Debt Frontiers – Amazon and Australia

Amazon, the giant online retailer, recently issued debt at absurdly low rates. Per this Bloomberg article:

Amazon, which had no bonds outstanding, sold $750 million of 0.65 percent three-year notes that yield 38 basis points more than similar-maturity Treasuries, $1 billion of 1.2 percent five-year debt with a 63 basis-point spread and $1.25 billion of 2.5 percent securities maturing in 10 years that yield 93 basis points more than benchmarks

Let’s look at those yields again. Amazon is able to issue 10 year bonds with a yield of 2.5%. That is an amazingly low rate for a company that barely makes a profit, albeit one with a giant market cap.

Nowadays you don’t even have to have a REASON to issue debt. Amazon issued this debt partially to pay for their new corporate campus and partially for “general corporate activities”.

When corporations can issue debt at these sorts of low, low rates you really need to think about the rate of return that you are expecting for your portfolio. These sorts of low rates either point to a “bubble” in corporate debt (it doesn’t look like a bubble to the less sophisticated because they associate high prices for stocks or real estate with a bubble, but in terms of bonds, a low interest rate on a longer term maturity means that you essentially got a lot without paying much to investors in return) or just a long term re-setting of expectations among bond investors, a capitulation of sorts.

On the other side of the world, Australia is having a wild ride. The Australian Dollar is coveted because it is a “commodity economy” and is independent of the typical reserve currencies such as the US dollar, the Euro, and the Yen. Australia also offers higher (relatively) yields on their government debt. When I was in Australia many years ago the Australian Dollar was 60 cents on the US dollar; the Australian dollar is now stronger than the woeful US dollar (or US peso). As a result of these strengths, 63% of Australian debt is now held by foreigners (per the article). Recently some government officials are calling for a more formal registry into who is buying their bonds; the government is attempting to reduce the value of the Australian dollar because it is hurting tourism, exports and their international competitiveness and reduced interest rates significantly as a result. But all is to no avail as the value of the Australian dollar stays high, buoyed in part by the robust demand by foreigners for Australian denominated assets such as government debt.

It is a strange world where a company that doesn’t have much of an actual profit can raise debt at rates not much higher than the US government and a country like Australia has giant demand for their currency and government debt due in part to its diversification from the typical currency basket components.

Cross posted at Chicago Boyz


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