An iLoss to Apple Inc. (AAPL) Bondholders

Another large issuer from last month is General Motors Company (NYSE:GM). The American auto company issued $1 billion of 2.75%, three-year notes yielding 241 basis points more than similar-maturity Treasuries and $750 million each of 3.25%, five-year securities with a relative yield of 250 basis points and 4.25 percent 10-year bonds at a 247 basis-point spread, according to Bloomberg data.

Historical perspective

Over the last 20 years or so, the average high-yield bond has paid about 500 basis points (5%) more income than similar treasury bonds. The panic in the fall of 2008 pushed the “spread” – the difference between treasury yields and high-yield bond yields – up to nearly 2,000 basis points. In other words, high-yield bonds paid almost 20% more than treasuries.

When yields go up, bond prices go down. In the fall of 2008, the prices of these high-yield bonds plummeted. The credit-market panic meant companies were unable to issue new debt. After all, who can afford to borrow money at 20% interest rates? Big bondholders, like pension funds and institutional investors, were worried they’d soon be holding an empty bag, so they dumped their bonds into the market. The massive wave of selling pushed prices even lower. But then, a swift recovery happened in the bond market and prices have been skyrocketing ever since.

My Foolish take

I believe future generations will view the current market for high-yield bonds as a prime example of the madness that has gripped the world’s markets since September, when the Federal Reserve began the monthly printing and purchase of $85 billion worth of government debt. Apple Inc. (NASDAQ:AAPL) is just one good example of a company whose business will do just fine while its bondholders will not.

The article An iLoss to Apple Bondholders originally appeared on Fool.com.

Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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