Are These Four Companies Now a Surer Bet Than US Bonds?
As the debt ceiling standoff continues unabated, with neither side showing any signs of wilting, it becomes more likely by the minute that the United States will default on its outstanding loans (NYSE:TLT) come August 2nd. If that day comes and passes, it also becomes nearly certain that credit ratings agencies Moody’s (NYSE:MCO) and Standard and Poor’s (NYSE:MHP) will follow through on their threats and cut the AAA rating on U.S. sovereign debt. This means that for the first time a group of private companies would have a higher bond rating than the federal government, according to the Financial Times.
The agencies have re-affirmed AAA bond ratings for Exxon-Mobil (NYSE:XOM), Johnson and Johnson (NYSE:JNJ), Automatic Data Processing (NASDAQ:ADP), and Microsoft (NASDAQ:MSFT). It might seem strange that these market components may soon be viewed as a safer bet than their governing nation, though analysts say the development is just a sign of the times as a global corporate economy means less dependence on home nations. “It’s a new world in that these companies have transcended the national and political boundaries,” says investment strategist Jim Paulsen. “Economic boundaries are becoming more important than political ones. I can understand where they [rating agencies] are coming from as these are geopolitical global companies.”
Will bond investors agree with ratings agencies that say private companies will offer more stable returns on investment than public governments? “There is the argument that no entity can be higher rated than that of their home country’s sovereign credit,” says Jack Ablin, chief investment officer at Harris Private Bank. “But there is a certain dimension that makes large mega-cap companies very attractive. These companies source, hire and fund themselves globally and the reach of government tax policy can only go so far. If push comes to shove mega-cap companies can relocate outside the US.”
Experts caution though that corporate bonds will not really offer an alternative to government treasury bonds, due to the lower amount of liquidity available, as companies usually keep a small amount of debt on balance sheets. “The reason why these US companies are triple A is because they don’t have much debt,” says Jason Brady, a portfolio manager. “They are not really an alternative to Treasuries. It does not mean that they cannot trade [with yields lower than Treasuries] over time. If the financial situation of the US continues to deteriorate, sure they can.”