Remember Those Apple Bonds?
Submitted by Tyler Durden on 05/29/2013 16:39 -0400
Remember when on March 19 of last year every homeshopping financial network was pitching the then just announced annual AAPL dividend of $10.60 as the greatest thing since the Apple Newton sliced bread, that it would send the stock into hyperspace as it unlocked an entire universe of dividend buyers, and that AAPL would provide countless years of fixed-income equivalent fun? Well, it did send the stock soaring. Briefly. It then crashed, and is now at a price which is almost to the dollar unchanged from a year ago when adding the benefit of dividend cash flows.
Fast forward to today, or rather a month ago when on April 30 AAPL announced that in lieu of repatriating its $100 billion in offshore cash it would instead sell $17 billion in 3-30 Year bonds, a move which some speculated is an interim top in the bond market. They were right.
What followed was a quick and painful, for some, lesson in duration and bond math (and a reminder of what happens to both dividend stocks and rate-sensitive prices in a rising rate...supposedly...environment):
What happened? Well, Treasury yields soared. Which means that all linked instruments with duration exposure, such as the above AAPL bonds, got doubly crushed:
- The 10 year which priced at +75 (and par of course) has lost nearly 5 points of notional in less than a month.
- The 30 year (at +100) - down nearly 8. All of this in under one month.
Biggest winner here - Apple which raised hundreds of millions more by coming to market then and not now. The losers? Those who bought the bonds. But don't worry: these are just paper losses, and paper losses never become real losses.
Of course, this is simply a preview of what will happen to all risk classes in a rising interest rate environment (especially in an economy in which the bulk of EPS growth in the past two years has come from the net interest line which has collapsed resulting in a boost to EPS). What is worse is that stocks tend to cancel dividends when prices plunge at whim, or when they anticipate economic difficulties, which further crushes the stock. At least bonds have immunity from management team whims.
Wouldn't it be ironic if as a result of expectations of rising yields, the resulting drop in bonds is less than what happens to stocks: including dividend stocks, and results in a greater rotation, only in precisely the opposite direction of where the Fed wants?
Either way, still think rising rates are good?