12th June 2012
Some six months ago in Get real, we asked whether US treasuries could be described as ‘investments' in any meaningful way. At the time 30-year US debt was yielding 3% whereas now it yields 2.8% – in other words, the market is allowing the US government to borrow money for 30 years at 2.8%.
Ask anyone whether they think interest rates in the US over the next 30 years will average out at 2.8% and they are likely to see that as too low – indeed even the uber-bears, who are suggesting the US is going to be Japan all over again, would probably see that as unlikely. Yet many people would still buy treasuries on that yield today because they are seen as a safe haven.
Pausing only to suggest they might do well to reflect how safe their investment really is on such a valuation, we will move onto the real focus of this piece – the yields at which two of the UK's largest companies have been able to raise debt in recent weeks. Diageo and GlaxoSmithKline both issued bonds for various lengths of time or ‘duration' but, to take the longest period for each as an example, Diageo raised $500m (£318m) for 30 years at 4.25%, while Glaxo raised $2bn at 2.85% over 10 years.
Regular visitors to The Value Perspective will know we prefer businesses with low debt to those with high levels of gearing, but here comes the exception that proves the rule. If a company is able to borrow for 30 years at around 4%, then – with the obvious proviso that it has a reasonably prudent balance sheet – it should be taking on as much debt as it can.
In the context of history…
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