Microsoft (MSFT) Offering Indicates Continued Pessimism

Thursday, September 23, 2010

Microsoft (MSFT) offered $4.75 billion in AAA-rated bonds yesterday at rates nearing record lows. The software behemoth boasts an impeccable balance sheet with $37 billion in cash on hand against a minor $6 billion in strategic debt. Microsoft is a cash machine generating $24 billion in operating cash flow over the last 12 months. Given the company's standing, investors would clearly be willing to accept very low yields. Yet, the pricing was still fairly astonishing given what it implies about expectations for economic growth.
The company’s $1 billion of 0.875 percent notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. (Bloomberg)
The 0.875 percent on the 3-year notes is a minuscule 22.5 basis point spread over Treasuries. Investors' willingness to accept a yield well below 1% for the next 3 years shows continuing pessimism about the economic recovery in the United States and globally. The most recent run in Treasuries can largely be traced to heightened fears of a double dip and festering worries about the potential for a deflationary spiral. I was quoted saying just such in Investor's Business Daily this morning:
The yield on the benchmark 10-year bonds closed at 2.56% Wednesday. Yields are pricing in an overly pessimistic view on the economy, said Brandon Rowley, a trader at T3 Capital Management. The Fed's comments Tuesday suggested it is willing to do what it takes to create inflation, which would drive yields higher. (IBD)
I am much more optimistic about the recovery occurring within the United States and around the world. Granted, the employment picture is troublesome as the unemployment rate remains persistently high. Yet, every other metric for gauging economic growth is on the mend. Investors are never rewarded by waiting until the outlook is bright and the massive shift into bonds we've seen throughout 2010 is likely a mistake in the long run. Safety of principle is great but the Fed is committed to inflating and growth is happening, at blistering paces in some emerging economies. A sub-1% return for the next 3 years is far from attractive in my mind.

Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Nothing relevant.
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