Did Apple Just Ring the Bell for the Bond Market?
U.S. stocks are flat this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.14% and 0.12%, respectively, at 10:10 a.m. EDT.
An aging bull market looks tired
"Will Apple's $17bn debt sale in April turn out to be the 'AOL buys Time Warner' moment of the three-decade bond market bull run?" asks an article posted yesterday afternoon on the Financial Times website, referring to the monstrous 2000 acquisition that was put together at the height of the technology bubble.
At the end of April, the iPhone maker completed a $17 billion issue priced to yield 3.9% -- the largest ever. Racking up those numbers was not difficult: Demand for the issue reportedly reached $52 billion. Investors have a ravenous appetite for any incremental return over the starvation yields that government bonds offer.
However, six weeks on, investors who bought those bonds are now looking at a 9% paper loss: The bonds were trading at $0.904 on the dollar as of Monday evening. Apple's case is not exceptional; all major segments of the bond market have produced negative returns since the end of April. Why? Two factors are at work here, as illustrated in the graph below:
A sharp rise in benchmark Treasury yields (blue line, left axis)
A sharp rise in the additional spread that corporate bonds offer (red line, right axis)
Why this reversal in yields and spreads? It appears to be dawning on the market that the Fed won't prop up the Treasury and mortgage bond market forever. Once the central bank tapers (and, ultimately, ends) its latest, open-ended round of quantitative easing, bonds will cease to be a one-way bet. In fact, as interest rates normalize, bonds -- particularly those with longer maturities -- could inflict substantial paper losses on those who own them (shareholders of the iShares Barclays 20+ year Treasury Bond Fund , you have been warned).
Armed with this new consciousness, investors withdrew $8.8 billion from U.S. bond funds in the week ended last Wednesday, according to EPFR global. That's the largest weekly amount since the firm began tracking these flows in August of 2001.
Is the bull market in bonds over? It's impossible to predict the timing of that milestone, but it doesn't take a psychic to know that bonds are not an attractive long-term proposition -- even after this recent mini-correction.
More on Apple
There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons both to buy and to sell Apple, as well as what opportunities remain for the company (and your portfolio) going forward. To get instant access to his latest thoughts on Apple, simply click here now.
The article Did Apple Just Ring the Bell for the Bond Market? originally appeared on Fool.com.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
