Apple bond sales fuel speculation US rates poised to rise

[SINGAPORE] Apple's mega bond sale is fueling speculation US interest rates are poised to increase.

The iPhone maker issued US$6.5 billion of debt Monday, locking in borrowing costs for as long as three decades. The sale follows a plunge in benchmark Treasury yields, with US 30-year yields falling to a record last week. They may not stay this low if forecasts for the Federal Reserve to raise rates are correct. An Apple bond sale in 2013 coincided with the record low in company borrowing costs.

"This is the right time to issue corporate bonds," said Kim Youngsung, the head of overseas investment in Seoul at South Korea's Government Employees Pension Service, citing Apple as an example. "Interest rates will go up in the middle of this year." The retirement fund manages the equivalent of US$13.7 billion.

Treasuries returned 2.9 per cent in January, the biggest monthly advance since December 2008, according to Bank of America Merrill Lynch indexes as sliding oil prices and political uncertainty in Greece drove demand. The securities have fallen for the past two days amid oil's longest rising streak since August, and as Greece's new Syriza-led government as the nation was said to retreat from a demand for a debt writedown from its creditors.

"On the basis that two of the key drivers of the continued move down in Treasury yields this year were the drop in oil prices and then the growing uncertainty surrounding Greece, the Treasury market has seen a decent pop higher in yield," said John Davies, a US interest-rate strategist at Standard Chartered Bank in London.

When Cupertino, California-based Apple sold bonds on April 30, 2013, the US$17 billion issue was the biggest corporate-debt offering on record at the time.

Two days later, the US average investment-grade corporate bond yield fell to an all-time low of 2.64 per cent, based on Bank of America Merrill Lynch data that go back to 1996. The yield is now 2.90 per cent, which compares with the average of 5.38 per cent during the period.

Futures contacts indicate there's a 62 per cent chance the Fed will boost its benchmark to at least 0.5 per cent by December, according to data compiled by Bloomberg. Policymakers have kept the target for overnight loans between banks in a range of zero to 0.25 per cent since 2008.

It's not a sure thing that US government and corporate bond yields will push higher, said Will Tseng, a portfolio manager in Taipei at Mirae Asset Global Investments, which oversees US$63.9 billion.

"Even if the Fed starts its first rate hike this year, it doesn't mean the overall interest-rate environment will be very high," Tseng said. "The policy rate is still lower than 1 percent. I don't think corporates should be afraid of a higher- rate environment," including Apple, he said.

Fukoku Mutual Life Insurance stayed away from the Apple bonds, said Yoshiyuki Suzuki, the company's head of fixed-income in Tokyo. Government and company yields are too low, he said.

"It's a good time to borrow the money," Suzuki said. "It's not good timing for the investor." Fukoku has the equivalent of US$54.3 billion in assets.

The US 10-year yield will climb to 2.75 per cent by year- end, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weighting.

BLOOMBERG