A Christmas Gift From the Fed

 

When someone gives you money, it’s usually a cause for excitement. Who wouldn’t want a few extra bucks in their pocket, particularly right around the holidays?

How grateful would you be for an extra $50 or $100? How about an extra grand?

If someone I didn’t know walked up and gave me a thousand dollars, sure I’d be suspicious at first, but then I’d be pretty darn happy.

Based on that logic, companies should be delirious with joy… all thanks to the Fed.

Recently both Microsoft (MSFT) and Johnson & Johnson (J&J) issued corporate bonds. The two companies don’t have a great need of cash – they generate plenty on their own – but the environment is ripe for selling bonds.

Right now interest rates are at ridiculous lows as investors clamor for any yield they can get. This means that strong companies like Microsoft and Johnson & Johnson can place debt for a song.

The low interest-rate environment is of course part of the Fed’s strategy for rebooting the economy, no matter how ineffective it has proven to be. To this end the Fed has held short-term rates to the 0% to 0.25% range, and has used trillions of dollars to buy mortgage-backed securities and U.S. Treasury bonds to force interest rates lower.

As the Fed swipes these bonds off the markets, it not only drives down interest rates but also takes fixed-income inventory off the shelves. This is where Microsoft, Johnson & Johnson, and other high-quality issuers come into the picture.

While U.S. Treasury 10-year bonds yield a scant 2.78%, Microsoft was able to sell 10-year bonds at 3.625%, or a modest 85 basis points more in yield.

Imagine that! Being able not only to sell 10-year corporate debt at such a low rate, but also to sell the debt at such a tight spread to U.S. Treasuries.

For Johnson & Johnson the deal was even better. The century-old company was able to sell 10-year bonds at 2.95%, or a mere 17 basis points above the comparable yield for U.S. Treasuries. Talk about a free money!

There is no way to know exactly what interest rates would be without Fed intervention, but we can safely assume they would be higher. And of course higher interest rates would make debt more expensive.

Just a single percentage point of interest could make a big difference. Considering that Johnson & Johnson sold $3.5 billion worth of debt and Microsoft sold $8 billion of debt, a 1% increase in interest would have meant a $35 million increase and $80 million jump in interest costs per year respectively. And to think that I would have been excited by a mere $1,000.

Of course, the savings don’t come from a magic pot at the end of a rainbow. Instead, the money comes from savers.

While the Fed is busy bundling corporate gifts for borrowers, it’s acting as the miserly Grinch when it comes to savers. Those of us stuck in Whoville can only shake our heads as Ben Bernanke & Co. come down the mountain from the Eccles Building and make off with our hard earned dollars.

The world of investing for income is definitely much harder today than it has been for years. However, there is opportunity, you just have to know where to look. We are fortunate to have editors like Eddie Speed joining our ranks to bring you great alternatives to the typical “buy a bond and be grateful” fixed income way of thinking.

Rodney

twitter
Follow me on Twitter @RJHSDent

 

Ahead of the Curve

What Economists and Philosophers Have in Common

For all of time, philosophers have worked to expunge all that is fleeting and artificial in the world, aiming to unveil fundamental truths.

Dow Heading for Historic Drop – Take Immediate Action

World-renowned economist Harry Dent now says, “We’ll see an historic drop to 6,000… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse, gold will sink to $750 an ounce and unemployment will skyrocket… It’s going to get ugly.”

Considering his near-perfect track record of predicting economic events long before they occur, you need to take action to protect yourself now. Get the full details…

Click to Learn More
Categories: Markets

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.