Thanks to a bailout of the corporate bond market by the Fed that has institutionalized moral hazard (I get the reward, you take the risk), junk bond issuers are paying rates of less than 3%.
Ball Corp, which is rated BB+ sold $1 billion worth of 10-year bonds at a coupon of 2.875% this week. Ball corp. isn’t a horrible business, but at rates this low, even horrible businesses can make money.
The rate distortion is even more disturbing in the investment-grade market. Google, an AA-rated company, recently issued 5-year bonds at a 0.45% interest rate. What will Google, which generates billions in free cash every year do with what is essentially free money? Buyback more stock would be our bet.
America’s retirees get short-changed with record low Treasury and corporate bond rates so that Google can boost its stock price and the value of its employee stock options via buybacks.
Sounds about right for government intervention.
Barron’s has more:
The beverage-can manufacturer is rated BB+, one tier below investment grade, and just sold $1 billion of 10-year bonds with a coupon of 2.875%. That is the lowest on record for a high-yield bond maturing in more than five years, according to Bloomberg. It has a “Stable” outlook from S&P Ratings and Moody’s, meaning that the low yield can’t be explained by expectations for an upgrade.
The new record is just one indirect consequence of the Federal Reserve’s late March promise to backstop corporate debt. While the central bank has promised to support some junk-rated borrowers—if they were rated investment grade before the pandemic—Ball doesn’t even qualify for that support, because it was rated junk on March 23. But investment-grade yields have plummeted as the result of Fed support, pulling junk-bond yields down with them.