An investment of $1 million in this Apple AAPL bond, which matures in 2060 and offers a 2.55% yield, has seen its value decline to $600k. The looming concern here is duration risk. Let’s also consider the numerous mortgage-backed securities on bank balance sheets.
Who would opt for a bond with such an extensive duration at such a meager interest rate? Waiting 37 years to recoup your initial investment seems like quite the unfavorable wager or store of value.
Long-duration bonds exhibit heightened sensitivity to fluctuations in interest rates. Additionally, a low coupon rate exacerbates the bond’s susceptibility to changes in duration and price. Those new to investing should perhaps concentrate on constructing a 2-7 year ladder before venturing into securities maturing in 2060..
This bond belongs to Apple Inc. (AAPL), and there’s been no noticeable credit deterioration.
Consider the implications of the mark-to-market approach for companies that employed low-cost debt for equity buybacks. Ponder the duration gap between said equity and the debt, as well as the impending need to refinance the debt. What’s the mark-to-market scenario in this context? Furthermore, let’s not overlook pension funds that have invested in these bonds.
Visualize leveraged positions that employ these bonds as collateral. The potential for margin calls is substantial.
Think about the mark to market on companies that bought back their equity with cheap debt…think about the duration gap between that equity and the debt…and that they will need to refinance that debt. Mark to market on that? And think about pension funds who bought this paper. Imagine leveraged positions using those bonds as collateral. Margin calls left and right…
Got to hand it to AAPL as well in timing this bond offering, as a shareholder you’ve got to like it. AAPL was almost as smart as the Government of Austria which issued 2120 paper! I remember my Schwab Rep calling me and asking me if I wanted some on the day it was issued. I laughed so hard I couldn’t finish the call. Told her I would have to call her back…in a few years.
