• Lance

Buy the iPhone Now; Buy the Bond Later

Updated: Sep 28, 2021



Apple Day. It's such a big deal in America they might as well make it a national holiday.


Yes, kiddies, Apple is releasing its new iPhone next week, along with the new Apple watch and iPad Mini. Most investors will celebrate by picking up some Apple shares (Ticker: AAPL), but being bond people, we at Arthur thought why not pick up some of Apple's bonds.

It's hard to find something with higher quality than Apple's 30-year bond maturing in 2051. The bond yields 2.64% (Sept. 15) Compared to the 30-year U.S. Treasury bond's yield of 1.84% (Sept. 14). Here, you're getting 43% more return, for hardly any more risk. Another comparison is banks are currently charging 2.8% for a 30-year mortgage. So, you're getting almost the same return as a bank, for a lot less risk.

 

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How safe is it? Apple is the world's largest company and Standard & Poor's gives the bond its highest rating of AA+. At the end of the June quarter, Apple reported current assets of $114.42 billion, current liabilities of $107.75 billion and long-term debt of $105.75 billion. Apple could pay off either all the debt due within 12 months, or all its long-term debt tomorrow if it wanted. Can't be any safer than that.

But let's get beyond the boring stuff. We think there's an opportunity to grab even more yield if you're willing to bide your time.

In March, about a month after this bond was issued with a coupon of 2.65%, the price of the bond dropped 11% to $89, which sent the yield to 3.24%. For people who bought that day, this effectively increased Apple's yield by 23%. The funny thing was it had nothing to do with Apple's business.

At the time, a rash of stories about rising inflation hit the market. The current fear is that if inflation continues to grow at a fast pace the Federal Reserve Bank is going to have to raise interest rates. A foundational rule of the bond market is that when interest rates rise, bond prices fall. And when bond prices fall, the bond's yield rises in order to pay a competitive return.

Now, let's compare that 3.24% Apple yield to bonds with a lot of risk. According to the ICE BofA US High Yield Index, high-yield bonds effectively paid 3.95% on Sept. 14. So, if the price of Apple's bond drops again, there is a good chance that you could receive a yield pretty close to that of bonds from companies with a high risk of default for the least amount of risk possible. When a high-quality bond pays a rate close to high-yield bonds, that's like Christmas in July for bond investors.

At Arthur, we've seen this story before. Rumors that the Fed will soon raise rates will once again send the price of Apple's bond lower, basically putting it on sale. We'll be waiting and watching for that to happen, and when it does we'll be picking up the Apple bond. You should too.

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