What's going on?
Investors snapped up fresh bonds sold by IBM and pharma giant Bristol-Myers Squibb – but ducked the US government’s latest bond sales this week.
What does this mean?
Thanks to one of the biggest bond sales ever, IBM’s new $20 billion will help pay for its acquisition of software company Red Hat, announced in October. And Bristol-Myers’ $19 billion from fresh bonds will help it swallow rival Celgene in a $74 billion deal. Both companies’ debt due in 10 years offered investors a 1% higher interest rate than comparable US government bonds.
Meanwhile, Wednesday’s sale of super-safe US government IOUs was met with the lowest investor demand since 2009. And some investors think they see reds under the bed… (tweet this)
Why should I care?
The bigger picture: Crouching tigers and hidden dragons.
China owns almost a third of all US debt held outside America. The communist dragon is usually a big buyer of Uncle Sam’s bonds: he’s good for it since the US can always print more money to pay its debt. Some investors suggested China may have refused to bid for new bonds in response to fresh US tariffs inbound on Friday. Lower demand for American bonds may have forced the US to pay higher rates to entice investors. Still, China’s good behavior may be bought and paid for: lackluster demand pushed the prices of existing government bonds lower on Wednesday, and the biggest foreign owner of US bonds probably won’t want to crush the value of its own investments. In a few weeks, public records will reveal how much Chinese shenanigans plagued the bond sale – if at all.
For markets: Investors love company (bonds).
It’s been relatively smooth sailing for company bond prices lately, thanks to consistent demand – despite global debt levels hitting record highs and several investors claiming such bonds are too expensive.