Apple Bonds Yield More than Spanish Debt

MORNINGSTAR INVESTMENT CONFERENCE: Risk is no longer being rewarded, so how can bond investors find stable, inflation beating returns without default risks?

Emma Wall 13 May, 2014 | 12:01PM
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Bond investing has become a topsy turvy universe – where default risk is no longer rewarded, and safe havens such as gilts are eroded by inflation.

Speaking at the Morningstar Investment Conference, Invesco Perpetual co-head of fixed income Paul Read said that it was an example at how warped by external factors the bond market had become that Apple (AAPL) – a cash rich, low-risk company was yielding more than Spanish government bonds.

“When Apple issued a bond in Spring last year, it was the biggest bond issue of all time and yielded 2.4%, it is now 3.5%. In the same period Spanish government bonds have gone from paying 4% at to and now yielding less than Apple,” he said. “So you are being rewarded more buying corporate debt of a cash rich company than a debt ridden country. To compare - 50% of US youths have Apple products or aspire to having Apple products. Fifty per cent of Spanish youth aspire to having a job.”

With so many multi-asset managers overweight equities it is hard to argue the case for bonds. Even Read admits that there are better opportunities for income out there – citing Asian equities as one example.

“My colleague is investing in blue chip Asian equities and being paid 3.5% for the privilege – that sounds like the premise for an excellent bond, but blue chips are not paying that.”

He is right. FTSE 100 companies are rewarding investors with inflation-beating dividends, but if you buy the same company’s corporate debt you will not get as high a rate of income.

One of the factors driving down bond yields is demand. The market moves so fast, that in the time analysts take to do due diligence on a bond issue, it is overpriced and oversubscribed.

Recent examples of this appetite include bond issues from Nationwide, the Spanish government and Verizon.

“There is a massive demand for income out there and it is making valuations look strange,” said Read. “As a medium term investment there is better value in the equity market – I am clearly not here to advertise.”

The difficulty for investors is coming to terms with this new low-yielding reality. In 2007 you were earning up to 5% for ‘safe’ issues – government bonds from Germany, the US and the UK. Not Germany borrows at less than 2%, meaning that investors’ income has halved in seven years.

The high yield market has been similarly slashed. In February 2011, more than 70% of the European high yield market paid more than 5%. Now it is more like 20%.

Irish government bonds pay less than All World market benchmark – when not that long ago, you wouldn’t touch Irish bonds for any yield. Similarly Greek banks’ yield is not that attractive.

“Two years ago we were getting 6/7% from Spain and Italy – and when we bought them many of our peers thought we were mad,” said Read. “Now we don’t own that much and their yields have fallen to 3%. Now everyone is buying them and no one says what are you doing?”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Apple Inc225.01 USD0.47Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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