The Shortest Treasury Bills

As we mentioned in the textbook, generally the shortest Treasury bills issued are 13 week maturity. However, given the recent debt ceiling problems, the Treasury issued cash management bills (CMBs), with a one day maturity. On Friday, June 2, the Treasury sold $15 billion in one day CMBs, to be issued on June 5 that mature on June 6. Over the past 25 years, the Treasury has held six CMBs auctions with a maturity of one day. And on June 1, the Treasury auctioned $25 billion in three-day bills.

Century Bonds Issued

With the threat of an increase in interest rates, it appears to be a good time for borrowers to lock on interest rates for a long time. TTUN is the latest to do so, issuing $1.2 billion worth of century bonds, that is bonds with a 100-year maturity, at a coupon rate of 4.45 percent. At the same time, TTUN issued $800 million of 30-year maturity bonds at 3.5 percent. Other Big Ten universities, including the University of Minnesota, Michigan State University, Rutgers University, and THE Ohio State University have issued century bonds in recent years.

Apple Shines

Moody's recently upgraded its rating on Apple's long-term debt. Apple joins Microsoft and and Johnson & Johnson as the only three U.S non-financial corporations with AAA rated debt. Moody's credits the better credit rating with substantial operating scale, large installed base of products and services, strong customer loyalty, and brand positioning.  

Bonds May Save Reefs

Belize is well-known for its coral reefs and scuba diving, including the Great Blue Hole, which Jacques Cousteau called one the five best dive sites in the world. Now, Belize may help save its coral reefs through bonds. Belize has a "superbond" outstanding, which is a combination of previous bond restructurings. The par value of $572 billion is part of Belize's 133 percent debt-to-GDP ratio, which the International Monetary Fund has stated is unsustainable. Belize is engaged in talks with bondholders to exchange $550 for every $1,000 in par value. Under the terms of the agreement, Belize will invest a significant amount in support of marine conservation aimed at protecting its reefs. Currently, 50 percent of bondholders have agreed to the terms, although 75 percent of bondholder support is necessary for the proposal to pass. 

Muni Bonds Go Green

The issuance of green muni bonds is a small part of the overall muni bond market, but the segment is growing. In 2012, $2 billion of green munis were issued, but that grew to $234 billion in 2020 and a projected $375 billion in 2021. Although green corporate bonds can be used for a variety of investments, green muni bonds are often used to fund clean power, water, and sewage systems. Green muni performance compared to regular muni bond is not clear as green bonds outperformed prior to 2019, but underperformed by a large margin in 2020. As with any muni bond, green muni bonds are a source of tax-free income.   

Bond Ratings Jump

In early 2020, COVID-19 lockdowns slowed the economy and resulted in a record dollar amount of debt being downgraded. By the end of the year, the default rate on corporate bond reached 6.8 percent. Now, with the economy recovering, corporations are becoming healthy and a record $127.9 billion worth of debt was upgraded in May 2021. In early June, a record $340 billion had been upgraded over the previous 10 weeks. And in even better news, Moody's projects the default rate will fall percent to 1.7 percent by December.  

Green Bonds?

During 2020, a record $270 billion in green bonds were issued, and green bond issuance is on pace to surpass that record this year. And while we discussed covenants and the ability of bondholders to undertake legal action against the bond issuer for violating these covenants, as a recent article in the Wall Street Journal highlights, green bond investors have little to no recourse if the bond issuer does not use the bond proceeds for green projects. Even the definition of a green bond is somewhat nebulous. For example, Luxembourg packaging manufacturer Ardagh issued $2.8 billion of green bonds to fund the partial merger of its metal can unit. The green component of the bond? Ardagh committed to using an equivalent amount of the bond issue to purchase more recycled materials and increase energy efficiency. The bond was certified green by a leading independent agency.

Shrinkflation

You have heard of inflation, deflation, and stagflation. Recently, you may have noticed shrinkflation. Due to rising costs of raw materials and labor, producers have begun to shrink package sizes. For example, ice cream maker Tillamook announced that it was shrinking the size of its cartons from 56 oz to 48 oz, a 14 percent shrinkage. Since consumers tend to look at price rather than package size, the move is intended to keep sales constant. Of course, shrinkflation is really inflation in another guise. In fact, the United Nations FAO Food Price Index make its biggest leap since October 2010, and reached its highest level since September 2011. Shrinkflation is not a new phenomenon, but it is an indication of rising inflation. 

Convertible Issues At Record Pace

There have been 97 convertible bond issues totaling $54.3 billion so far this year, a record pace. The average coupon on these bonds has been 1.41 percent, with 28 convertibles issued at a zero coupon rate. And the average conversion premium is 39 percent. One issue with convertible bonds is that dilution may occur if the bonds are converted. Companies often pay $10 million or more to protect against dilution. Some of the biggest issues and conversion premiums occurred in February and March, before interest rates rose. For example, in February, Expedia issued $1 billion in convertibles with a conversion premium of 72.5 percent, and Airbnb issued $2 billion in convertibles with a conversion premium of 60 percent. The large conversion premiums to indicate a high level of confidence by bond buyers.

I Bonds

While most people are familiar with EE savings bonds, fewer are familiar with I bonds. A recent article in the Wall Street Journal highlights I bonds and the advantages of these bonds. One major advantage is that I bonds are yielding an currently very high interest rate of 3.54 percent. This is impressive when you consider the bonds are virtually risk-free. By way of comparison, 30-year Treasury bonds are yielding about 2.25 percent. I bond yields are based on the inflation rate and can change every six months. You cannot redeem I bonds for 12 months, and if you redeem within five years, you pay a penalty of the last three months of interest. You can buy electronic I bonds at www.treasurydirect.gov in any amount from $25 to $10,000, or paper I bonds in $50, $100, $200, $500, or $1,000 as a tax refund. One way to tell that I bonds are good investments is that the government caps the annual electronic purchase at $10,000 per individual, with another $5,000 possible through the tax refund purchase.

High Yield Bond Rates Fall

Through February 10, more than $13 billion of debt with a rating of CCC or lower has been issued, twice the previous record pace at this point in the year. But what is surprising is that the average YTM for the ICE BofA High Yield Index is only 3.97 percent. While this represents a 2.77 percent risk premium over current U.S. Treasury rates, only three years ago the 10-year Treasury yielded 3.23 percent. The current low, or even negative, yields for safe investments has investors chasing riskier investments to increase returns. Another reason for the low yields on junk bonds seems to be that investors believe the COVID-19 slowdown is temporary and the economy will recover quickly as vaccines are more widely distributed. 

An Interview With Eugene Fama

Recently, an interview with Nobel laureate Eugene Fama, who laid the foundation for the efficient markets hypothesis, was published by The Market/NZZ. The wide-ranging interview covers topics from the problems with growing government debt, stock market bubbles, the efficient markets hypothesis versus behavioral investing, the reason for negative oil prices, and negative interest rates. Professor Fama also discusses his belief that the power of central banks is much more limited than many believe. The interview is definitely worth a read.

Austria's 100-Year Bonds

In 2017, Austria issued 100-year bonds with a paltry yield of 2.112 percent. But recently, the country issued more 100-year bonds with the unbelievably low yield of .88 percent! And the issue was four times oversubscribed, meaning investors were willing to buy four times the amount of bonds than were being offered. Given the ultra-low interest rate environment, investors appear to be taking risks too attain any positive yield. For example, half of the German government debt has a negative yield, and the yields on Austrian government debt with less than 20 years to maturity are negative as well. 

NPR Goes Junk

 A recent podcast from Planet Money on NPR details the purchase of a junk bond issued by Hornbeck Offshore. Hopefully, the initial purchase was designed for the podcast, not as an investment. For example, the bond was purchased because it had the lowest price, which means the bond had the highest yield to maturity because it was likely the closest to bankruptcy. If you listen to the podcast, you will find out that the company did eventually go through a bankruptcy reorganization. One of the most perceptive comments made after the bond was initially purchased was that it would not likely make it to maturity. The podcast is worth a listen since it is an interesting journey of the purchase of a junk bond through the bankruptcy process.

COVID-19 To Hit Bonds

We're sure by now that you have seen the dramatic volatility in the stock market, along with the precipitous drop. But the recent economic slowdown caused by COVID-19 will officially hit the bond market soon. Moody's announced that it was undertaking a global review of bond ratings, with a mass of downgrade or downgrade warnings coming in the next several weeks. The review of airlines, cruise ship companies, and oil companies has already begun. About 9 percent of the companies Moody's reviews in Europe have significant exposure, and another 54 percent have moderate exposure. About 16 percent of the North American companies rated are at high risk of a ratings downgrade.

Yield Curve Inverts

In the textbook, we discussed a normal, or upward sloping, term structure, and an inverted, or downward sloping, term structure. The U.S. Treasury yield curve inverted again on Monday, after inverting at the end of January and in March 2019. An inverted yield curve has preceded the last seven U.S. recessions. However, several analysts are not convinced a recession will result from this inversion. U.S. Treasuries are regarded as a safe haven investment. Given economic issues around the world, the low 10-year yield may be driven by the demand for this bond, not U.S. economic conditions. Here is a question for you: Notice in the first sentence (and in the textbook), we discuss the term structure, but then change to the yield curve. What is the difference between the term structure and a yield curve?

Beer Bonds

Bonds do not necessarily have to pay cash coupons. A bond by Scottish brewery BrewDog highlights this point. BrewDog is considering a new bond issue that would have a 6 percent coupon, paid out as 3 percent in cash and 3 percent in craft beer. If you have buy one of these bonds, you would get a cash payment, a coupon for £20 in BrewBucks redeemable at the company's bars, a free book, and a free beer on your birthday each year you are a bondholder. Cheers! 

The Popularity of BBB Bonds

S&P, one of the major bonds rating agencies, has categorized bonds by credit ratings, and BBB bonds compose the largest chunk of corporate bonds. BBB bonds account for $3.2 trillion, or 53 percent of the outstanding investment grade bonds. Total BBB corporate debt, including term loans and revolving credit facilities, tops $7 trillion. One risk with this much debt just above the junk level is that an economic downturn could result in a large part of this debt being downgraded to junk status.

Century Bond Issues Increase

Interest rates continue to be at or near historic lows, which presents a unique opportunity for borrowers. And universities are beginning to realize the opportunity. Rutgers University announced that it would sell $330 million worth of 100-year bonds, and the University of Virginia recently sold 100-year bonds at a YTM of 3.23 percent. So far this year, $1.3 billion in century bonds have been issued. Corporate bond issuers Walt Disney and Coca-Cola have also issued century bonds. Demand for these bonds is being driven by low interest rates, causing investors to seek out yield in riskier investments.

Ford: A Fallen Angel

Moody's downgraded Ford's bonds to Ba1, into junk bond territory. The downgrade was due to lower operating margins, weak earnings, and lower cash flow creation. Some of the increased costs are due to Ford's restucturing plan, designed to improve performance in the future. S&P and Fitch did not downgrade Ford's debt to junk territory, indicating a split-rating in the company's bonds.