Markman Capital Insight

How Negative Swiss Bond Yields Help Apple

The weirdest thing going on in the world of finance right now, bar none, is the negative bond yields in the leading European countries.

Government bonds are supposed to be a loan from the private sector to the public sector that provides the lender with a steady, safe interest payment. That’s the way it has been since the dawn of time, or at least the dawn of public finance.

Yet right now, people have to actually pay Switzerland for the right to park money in its bonds. Almost the entire yield curve there out to ten years is negative, with investors/lenders forced to pay 25 to 300 basis points per year for the privilege of owning paper labeled with a red and white cross.

Naturally this is a disaster for elderly people in Switzerland, but it’s the same for pension funds and insurance companies, whose liabilities are rising with negative yields — especially since government regulations require them to have a certain amount of government bonds at year-end. Mortgage issuance is crazy in this environment, and banks are requiring very high down payments to even consider a loan.

There’s no moral to this story. This has never happened before, so no one knows what the outcome will be. Obviously investors are being incentivized to put their money into equities and business expansion — i.e., to take risks. But the law of unintended consequences says that the more you force people to take risks the less they want to take them! I don’t know what the result of this strange situation will be, but you can bet at least it is not what the designers of this policy expected. To be sure, as analyst Larry Jeddeloh remarked, what is certain is that the potential for a bad accident is rising.

For public corporations that can issue yield at negative debt, the situation is a gold mine. They can raise money and instead of paying for it — they get paid to take it away! Companies like Apple (AAPL) are taking advantage, issuing debt in Switzerland at -22 basis points and then turning around and using the money to buy back stock in the United States. This seems to be a better use of funds than building more factories and creating new jobs in a deflationary, low-demand environment. There are no textbooks that will tell you how this plays out. But my guess is that it’s good for U.S. stocks until it’s not.

Count on a lot more big companies issuing debt at negative yields in coming months, and similarly using it to improve their capital structure.