Tags: Microsoft | Apple | Borrowing | Rates

Microsoft Outdoes Apple Bellwether Borrowing Before Rates Rise

Tuesday, 10 Feb 2015 08:22 AM

A week after Apple Inc. tapped the bond market, Microsoft Corp. did one better with its biggest sale ever.

Now Apple is planning its first debt issue in Swiss francs, which will allow it to take advantage of record-low funding costs after government yields in the nation turned negative. Benchmark Treasury 10-year yields rose to 2 percent on Tuesday for the first time in more than four weeks.

The takeaway for investors: companies are borrowing before interest rates rise. The latest U.S. employment report showed the world’s biggest economy is improving. Futures contracts indicate investors are preparing for the Federal Reserve to increase rates this year.

“Apple’s known as a bellwether for issuing at just the right times,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc. in Tokyo. “They traditionally have issued with yields very close to the lows. Everybody’s always wary when Apple issues.”

Microsoft, which develops the Windows computer operating system and is based in Redmond, Washington, sold $10.8 billion of debt on Monday.

Apple, the iPhone maker based in Cupertino, California, issued $6.5 billion of bonds last week. The company will sell at least 1 billion Swiss francs ($1.1 billion) of bonds in its debut offering in the currency, according to a person familiar with the matter.

The bonds maturing in November 2024 are being marketed at a yield of 25 basis points more than the benchmark midswap rate and securities due in February 2030 are being offered at a spread of 35 basis points, the person said.

Yields Climb

Treasury 10-year yields increased two basis points, or 0.02 percentage point, to 2 percent at 7:33 a.m. in New York, according to Bloomberg Bond Trader data and touched 2.01 percent, the highest since Jan. 9. The 2.25 percent note due in November 2024 fell 6/32, or $1.88 per $1,000 face amount, to 102 7/32.

The yield has climbed from 1.64 percent on Jan. 30, which was the lowest since May 2013. It’s still less than the average for the past decade of 3.29 percent.

Employers in the U.S. added more jobs in January than economists predicted, capping the biggest three-month payroll increase in 17 years, and worker earnings jumped, government data showed last week.

Futures contacts indicate there’s an 84 percent chance the Fed will boost its benchmark to at least 0.5 percent by December, data compiled by Bloomberg show. Policy makers have kept the target in a range of zero to 0.25 percent since December 2008.

Falling interest rates are leading companies to borrow, according to Tom Tucci, head of U.S. Treasuries trading for CIBC World Markets Corp. in New York.

‘Still Looking’

“We’ve seen this several times,” Tucci said on Bloomberg Radio last week. “When we make these yield lows, corporations come in handily to try to issue and gain the low-rate advantage. People are still looking for yield but high quality as well.”

Microsoft has top level triple A credit grades from Moody’s Investors Service and Standard & Poor’s. Apple carries the second-highest rank from both.

U.S. investment-grade company bonds have returned 7.2 percent in the past year, versus 5.7 percent for Treasuries, based on Bloomberg World Bond Indexes.

Apple got it right when it sold $17 billion of bonds on April 30, 2013. It was the biggest corporate-debt issue on record at the time.

Two days later, the U.S. average investment-grade corporate bond yield fell to an all-time low of 2.64 percent, based on Bank of America Merrill Lynch data that go back to 1996. The yield is now 3.07 percent.

Debt Sales

The U.S. government is scheduled to sell $64 billion of three-, 10- and 30-year debt this week, starting with a $24 billion sale of notes due in February 2018 on Tuesday. The securities yielded 1.075 percent in pre-auction trading. That would be the highest rate at a three-year auction since April 2011.

“U.S. government bonds have built in a concession ahead of a heavy supply schedule, suggesting upcoming auctions should be comfortably absorbed,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The very strong U.S. employment report has prompted a re- pricing of U.S. rate expectations. We expect a modest Fed tightening in mid-2015.”


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A week after Apple Inc. tapped the bond market, Microsoft Corp. did one better with its biggest sale ever.
Microsoft, Apple, Borrowing, Rates
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2015-22-10
Tuesday, 10 Feb 2015 08:22 AM
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