What’s Going On Here?You’re safe now, citizen: Alphabet sold a record-setting $10 billion worth of bonds this week, and the all-American do-gooder will be using most of the cash to make the world a better place. What Does This Mean?There was almost $40 billion worth of investor demand for Alphabet’s bonds, which pushed their yields – effectively the interest rate the company will pay – way down. So far down, in fact, those interest rates have set a new record low.
And the records didn’t stop there: almost $6 billion of the money Alphabet raised will go toward environmental, social, and governance purposes, making it one of the biggest ever bond sales of its kind (tweet this). It intends to use the cash to fund – among other things – affordable housing, organizations supporting black entrepreneurs, and small businesses hit by coronavirus. Oh, and some clean energy projects are on the table too. Why Should I Care?For markets: Team bonding.
The high demand for Alphabet’s bonds is in keeping with the high demand for bonds globally. That demand has been supercharged by the US Federal Reserve’s unlimited bond-buying, which has made the asset look less risky overall and encouraged investors to buy. Of course, since yields all over the world are at near-record lows, most investors can’t hope to earn much profit from their purchases. But seeing as price increases (a.k.a. inflation) are so low and stock prices so high, bonds’ regular fixed payments might be more attractive than stocks – which might not pay you anything at all.
The bigger picture: Team falling apart.
If a company defaults on its bonds, bondholders take control of the company to get repaid however they see fit. Major government bonds are theoretically safer, since places like the US and UK pretty much never miss a payment. But that’s not true of riskier governments whose bonds offer higher returns: Argentina, for instance, is restructuring $65 billion worth of debt after yet another default. | 