Jim Armitage: That 'wafer-thin mint' moment is a worry
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Thursday 12 September 2013
Outlook Quantitative easing (QE) produces all sorts of weird effects. One of the weirdest has been the trillions of dollars big business has been able to borrow, dirt cheap, on the bond markets.
As falling yields on government bonds echo through super-low interest rates in the corporate debt world, companies have been stuffing bonds into investors' maws like John Cleese's maitre d' and Mr Creosote.
In June, the Bank of England's QE largesse enabled Vodafone to raise $6bn (£4bn) in bonds to fund its takeover of Germany's Kabel Deutschland. Danke schön, said the German shareholders. Then, last night, Vodafone's best buddy, Verizon, raised the biggest sum ever – $49bn – to fund its takeover of Vodafone's stake in it. Ta very much, say the Brits.
The appetite among investors to buy this corporate debt is unheard of. Verizon's New York bankers banging the drum for the bond issue were originally planning a roadshow this week to attract investors in Europe.
In the end, there was no need. So many applications flooded into Wall Street that they cancelled their flights to London.
The question now: doesn't this rush feel like that insane microsecond before the bubble bursts and our pension funds suffer another round of heavy losses? Are we at the "wafer- thin mint" moment for the bond market?
We asked the same when Apple borrowed enough to buy a small African state in April.
That $17bn binge was another record bond issue and investors in those bonds are already sitting on losses as the markets eye Federal Reserve governor Ben Bernanke's next move on the QE tap. Doommongers fret that so-called "tapering" of QE will kill investors' appetites for bonds stone dead.
The truth is probably a bit more complex and all depends on the bonds' price. Unlike Apple (and Vodafone, for that matter), Verizon had to pay a hefty premium of up to 2.25 per cent more than the yield (bondspeak for "interest rate") on US government bonds. This reflects two things:
First: Verizon appreciated if it wanted to stuff investors with such vast helpings of debt in one go it would have to pay them a bit extra to do so. Second: investors were chary about lending so much when QE is coming down the tracks.
They needed the reassurance of a better deal to reflect the fact that they're lending in a market moving against them.
This wasn't the case in April, with Apple – hence the smell of singed fingers on that deal, or Vodafone two months later.
In other words, although the Verizon bond sale is vast, the market is learning to price more realistically for a more normal world. A world where the Fed is not tampering with the market in a way that stops price reflecting risk.
Corporate bonds may well be heading for their Mr Creosote moment, but when the awful contents of the last few years' debt binges emerge for all to see, Verizon bonds' losses may not be the worst.
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