Bonds Galore!

Global bond yields are generally lower today, particularly in the US where they are 4-7 basis points lower along the curve.  A much weaker than expected December Retail Sales report deserves the credit (pardon the pun).  Speaking of credit, corporate bond markets are handling a huge wave of issuance rather handily, including a 100-year, £1 billion bond from Alphabet (GOOGL, GOOG) today.  The debt was heavily oversubscribed, even though none of the folks placing the buy orders will be alive to see the longest bonds mature.

OK, that last part was unfair. The primary buyers of bonds with maturity dates far in the future are institutions with extraordinarily long time horizons, like universities, pension funds, and charitable trusts.  Considering that the 100-year bond received £9.5 billion in orders, clearly there was sizable demand for that paper.  Yesterday, GOOGL raised $20 billion, and it was “merely” 5X oversubscribed.  Not to be left out, they also raised about CHF 2.75 billion.  All told, GOOGL had no trouble raising almost $32 billion in various currencies in two days.  

The 100-year attracted the most attention today because of its rarity.  Motorola was the last US company to issue bonds of that length when they did so in 1997.  Motorola was a market darling during the dotcom era, but the company later split up.  Motorola Solutions (MSI) now focuses on enterprise solutions and public safety equipment, while the “sexier” cellphone business is now owned by Lenovo.  Ironically, Google acquired Motorola Mobility in 2012 but then sold it to Lenovo in 2014. 

The most notable 100-year bonds were issued by the Government of Austria, which issued one bond in September 2017 with a 2.1% coupon and another in June 2020 with a 0.85% coupon.  Other non-governmental issuers include the University of Oxford and Électricité de France.  It is crucial to note that there is tremendous price risk for buyers in the early part of these bonds’ lives.  This can be expressed as “duration risk.” 

Bond duration is a measure of a bond’s price sensitivity to changes in interest rates. It indicates how much the bond’s price is expected to change in response to a 1% increase or decrease in interest rates. For example, a bond with a duration of 5 would be expected to appreciate by approximately 2.5% if interest rates fall by 50 basis points.  (Options traders will find this analogous to “delta,” the change in an option’s value for a $1 move in the underlying stock price.)  The durations of the Austria bonds are about 27 and 36, respectively, meaning that each 1% rise in interest rates would cut those bonds’ values by roughly ¼ and ⅓, respectively.  Even though the underlying credit remains solid, the 2.1% coupon bond currently trades around 58, and the 0.85% coupon trades for about 30.  The potential for mark-to-market losses and gains in paper with such long durations is material.

GOOGL and its peers need to rely on the munificence of bond investors for the foreseeable future.  Their exorbitant capital spending plans require it.  GOOGL had free cash flow of about $73 billion in 2025, a highly enviable statistic.  Yet they will need to come up with billions more in 2026 if they hope to achieve their announced goal of $175-$185 billion.  The recent $32 billion was of course an excellent start.  There is a similar story at Meta Platforms (META), with a 2026 capex planned for $115-$135 billion against $46 billion in 2025 cash flow, and Microsoft (MSFT), which is expected to invest $140 billion in 2026 after $77 billion in 2025 cash flow.  Amazon (AMZN) and Oracle (ORCL) are other companies with multi-billion-dollar capex plans that far exceed their current cash flows. 

It is reasonable to expect that bond investors will continue their desire to lend money to companies with highly entrenched, cash-and-earnings-generating businesses, but it would also be quite fair if equity investors re-rate these companies’ multiples.  Investors loved that these companies were able to generate huge profits with relatively few fixed costs.  Their business models may not have changed, but their fixed cost structures certainly have or will.  While it is difficult to imagine investors fleeing from these big spenders – MSFT’s recent plunge notwithstanding – it is also difficult to expect multiple expansion beyond current levels.  It will be up to them to reward investors by earning more, not just spending more.  If their heavy capex is the pathway into AI glory, then both stock and bond investors will be rewarded in the long run.  But all the current borrowing and spending might impede these stocks’ progress in the near-term.