I heard on CNBC this morning that Carnival, the cruise ship company, just raised $3.5 billion of unsecured, senior notes, due 2027, at a yield of 5.75%. WOW!
It wasn't many years ago that this would be a 6 year US Treasury yield. OK. We are clearly in a different era, but would you really give unsecured money to Carnival at this rate? Well, I suppose one can argue that it is better than Greek bonds close to 0% or so many instruments that offer, incredibly, negative returns.
Still, the message here is important:
1. There is an enormous amount of money looking for a home.
2. There is serious pressure to lock in yields, from insurance companies, to pension funds, to small investors trying to eke out a return on their capital.
Some of these investors, by charter, are restricted to fixed income. But in general, the market is confused between equity risk and the inherent risk in fixed income vehicles, whether the risk is a credit exposure, or rates. Locking in a mediocre junk credit at these numbers leaves investors very exposed to credit erosion, along with rate risk. Credit spreads, in my view, just cant tighten from here. These junk rates are as low as they have ever been in history.
On top of that, rate risk for even the best credits, especially in long duration instruments is significant, and far more exposure than many realize. A long duration asset can easily lose half its value with an increase in interest rates.
To me, this discussion underscores the excellent value in many old school names that are all elemental companies in our marketplace, with not only a yield that pays for the equity exposure, but in fact with significant upside.
I would and indeed have, invested my money in all of these names, and would never entertain these Carnival bonds:
ATT, yielding 7.27%, currently $28.55. Pfizer yielding 4.5%, currently $34.77. Dow, yielding 5%, currently $57.67. Cisco yielding 2.97%, currently $47.24. IBM yielding 5.34%, currently $122.24. Intel, yielding 2.36%, currently $58.86. Oracle, yielding 1.52%, currently $63.27. Newmont Mining yielding 2.5%, currently $59.54.
Yes, I do take "equity" risk, in stocks and commodities, and in the current environment am very long platinum group metals, gold and silver physically and in stocks. But I sure won't take that risk in the fixed income market.
We all need a home, and money does too. But you can buy a lot more for your money if you select the right "neighborhood."
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