Microsoft and Apple are safer bets than the U.S. government? Bond investors seem to think so.

By Joy Wiltermuth

Corporate bond spreads rarely are flat, or negative, to Treasury yields. Retirement planning is a factor.

Getting paid for the risks one takes is a rule of thumb for investing.

Unless, however, the company is Microsoft Corp. or Apple Inc., which have outstanding bonds that have been trading at negative spread levels to Treasurys, implying they're less risky than debt backed by the U.S. government.

BondCliQ put together the following chart at the request of MarketWatch, showing how in recent months a pair of bonds due to mature next year from Apple (AAPL) and Microsoft (MSFT) have been dipping below U.S. Treasurys on a spread basis.

The Apple bonds coming due in May 2025 were issued during the depths of the pandemic, while the Microsoft debt was raised a decade ago and matures next February, according to BondCliQ.

Bond spreads, like movements in stocks, function as a real-time gauge of risk appetite in debt markets. They tend to narrow in bullish times and widen when things get volatile. Rarely have they been flat, or negative, to Treasury yields.

"That's possible only because of the demand for credit," said Rich Familetti, chief investment officer, U.S. total return fixed income at SLC Management, speaking to a significant supply imbalance now gripping markets.

While corporate bonds lately have been kicking off some of the most attractive yields in a decade, supply has been harder for investors to get their hands on. That's mostly because major U.S. corporations, much like homeowners, rushed to lock in long-term debt at low pandemic costs, limiting their need to borrow since the Federal Reserve began jacking up rates in 2022.

At the same time, stable credit ratings and healthy corporate balance sheets have helped compress spreads to some their lowest levels in two decades.

"Normally at this level of credit spreads, we would reduce our corporate credit exposure," said Familetti at SLC, adding that the strong technical backdrop for corporate bonds has his team "willing to remain more invested than we would normally," instead of rolling more money into the Treasury market.

The spread on the ICE BofA US Corporate Index was last spotted at 92 basis points above Treasurys, carving out a path lower from roughly 3% in March 2020.

Like in the stock market, many investors in bonds also like having cash-rich technology giants in their portfolios, a potential source of stability - or liquidity - if markets get choppy.

Finally, when factoring in higher Treasury yields, the ICE BofA US Corporate Index has been kicking off a roughly 5.7% yield, among the highest in the wake of the 2008 blowup of global financial markets.

In a mid-April client note, Barclays analysts said that after all-in yields in investment-grade bonds crossed 5.6% in November, credit investors have been "focused on yield-buying."

Record annuities sales also have benefitted credit, with more investors turning to these financial products, which invest in investment-grade corporate bonds and asset-backed securities, to help fund their retirement. Annuity sales in the fourth quarter were north of $90 billion, about $25 billion more than the next-largest quarterly volume before 2023, according to Barclays.

Apple didn't immediately respond to a request for comment. Microsoft had nothing additional to share.

-Joy Wiltermuth

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04-25-24 0715ET

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