The Hater's Guide To Bonds With Rob Wigglesworth

What are bonds

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3:05Call Zone Media. Hello and welcome to Better Offline. I'm your host, Ed Zitron.

3:17Better Offline.

3:22Now, I've received a lot of lovely emails from you all about how you've enjoyed the show's slow descent into the madness of the financial markets. And so I wanted to bring on one of the titans of industry, author of A Fabulous Debt, The Epic Story of How Bonds Built the Modern World, none other than Financial Times journalist Robin Wigglesworth. Rob, thank you for joining me. No, thanks for having me on, Ed. I've been looking forward to it. All right. So I'm going to start with a very stupid question. What are bonds and why should the average person actually care about them? Yeah, well, actually, it isn't a stupid question because people do get tied up in knots about this all the time, including sometimes people in finance.

3:58But they're basically tradable loans. You know how you can buy and sell a stock on a stock market or an app or a brokerage? Well, bonds are just basically tradable pieces of loans that you can buy and sell just like a stock. And, you know, that can be treasury bonds issued by the U.S. government. They could be gilts issued by the U.K. government. In Germany, they issue bonds. In Japan, Japanese government bonds. But also big companies like Apple and IBM, they also issue these bonds, these tradable loans, to finance their big operations.

4:31Because the stock market doesn't actually finance that much. It's really mostly a way for investors to kind of cash out. But if I'm IBM or Microsoft and want to raise a ton of money to invest in something new, like a new factory or data center, I'm going to be issuing a bond to raise the money for that. Right. And, of course, the French ones are called Obligation Assimilable du Trezor or OATS. Anyway, sorry. Moving on from that one. So, and you have to be a corporation to issue a bond or a sovereign nation, right?

5:06Well, you could also be like a multinational organization, like the World Bank issues bonds, the European Union issues bonds. There are individual development banks that are kind of state-owned or controlled, but not quite. You can be Chicago. In the U.S., actually, you have this insanely huge and vibrant municipal bond market that finances like sewage, hospitals, schools, universities. But even the Church of England has issued a bond. It's kind of where most people actually go to finance.

5:38There's over half of all debt in the world is actually in the form of bonds now. And pretty much anybody can issue it, even if you and I can't do it. That's interesting. So, this is a very specific question. So, do cities sell bonds on the public market? Do they sell them locally, or is it some mixture of the two? A mix. Typically, let's say if I'm Chicago and I want to sell a bond, I'll go to a club of banks. They'll act as the underwriters. They'll basically kind of sometimes basically buy the bond off me at a price and then sell it on to investors.

6:12Because they have contacts on the Rolodex of all sort of pension plans, insurance companies, mutual funds around the Americas and the world. But they can also sell to individual investors. Like the municipal bond market in the U.S. is, I think, $4 or $5 trillion. A lot of that is actually bought by individual people in their local municipality. But, you know, you can buy, I can go onto a brokerage and buy a little bit of a slice of a U.S. treasury bond, or even a German bond, or a U.K. gilt. Or, in France, like it's an OATs.

6:45Yeah. But some of the stuff is kind of hard to source up. And, you know, most ordinary individual investors don't kind of spend lots of time going through the bond market. So, this is another specific one. So, when you go online and you look at the price of a bond, it's always shown in percentages rather than as the price of the bond. Why is that? And how should a regular person understand that?

Bond prices and yields

7:09Yeah.

Bond prices and yields

7:10And this is, I mean, this is definitely where things get a little bit loopy for a lot of people. So, it's a bond. It's a loan with a fixed interest rate. So, let's say if it pays 5% a year. Well, because it trades. Like, if you think the economy is going into recession and everything is going down the drain and you don't want to buy and hold any stocks, you quite want to hold bonds. And that 5% looks really attractive. You might pay so much for that loan that it starts trading above the par value. So, you're not buying $1 worth of bonds for $1.

7:42You're buying $1 worth of bonds for $1.10, for example. Right. And then the price is above par. And in fact, even though you're getting 5% interest, it has a 5% coupon in bond market powers. The actual interest rate you're going to be getting is lower. And on the flip side. Because you paid, so if the bond is paying 5%, but you paid more than the bond was worth, you're effectively getting less than 5%, just so that I understand.

8:13Exactly. That's it. Ah. Oh, okay. And let's say if you think, let's say you're lending money to, I don't know, let's say Microsoft, and you think Microsoft is doing stupid things, it's investing too much in AI or whatever, and you don't really want to take that credit risk. And you think maybe, look, I don't think Microsoft is going to go bust, but the bonds might start to weaken. Well, then you can sell it. It might trade below par, and that pushes the market interest rate, the yield that goes up, which is why you see in financial newspapers like the FT or the Wall Street Journal will often say that prices and yields move inversely.

8:50So if the bond price is going up, the yield is going down. And if the bond's price is going down, the yield is going up. So generally, lower yields means that it's a solid, strong borrower, that you get less of a return from investing in it because it's safe. Because there's less risk. There's less risk. And the higher the yield, the more risk there is, and the more chances there is that either you might not get your money back at all, or that the value of that bond might be eroded by inflation, for example. Right.

9:21So right now, the thing in the news, as you were well aware, is that the U.S. Treasury, the 10-year dated U.S. Treasury, so 10-year long loans to the U.S. government, they are selling off, which means that the effective interest rate is higher. Why is the 10-year so important? Why not the 5-year or the 2-year or what have you? I mean, it's just custom. If you go back 20, 30 years, you could almost say that the 30-year Treasury yield was the most important one.

9:53That was the longest maturity of Treasury bond that the U.S. government would ever issue. And that was kind of what people looked at as a sort of an example of long bond yields. But then, actually, the U.S., and this sounds crazy for us today, but it was actually running such big budget surpluses in the 90s that it just stopped issuing 30-year Treasuries. Oh. And basically, then, the 10-year just became the default what people look at. And it's not super long, but it's not like a two-year or five-year or six-year.

10:25A 10-year bond is just a very handy thing that almost every major country on the planet issues. So it's an easier kind of comparison. It's not always apples to peers to look at Germany versus the U.S., but at least you can kind of compare 10-year yields. So that's what most people do.

Government debt and growth

10:41So why is – so I've seen a lot in the news about how the U.S. has a deficit right now, is in they're spending more than they're bringing in, so they have to issue lots of debt. Why – I know it's kind of a silly, obvious question – why is that such a problem if the U.S. is growing faster than it's issuing debt? Well, if it is growing faster than it's issuing debt, that's usually not a problem.

And it's the one thing that kind of – as much as the U.S. government has borrowed an astonishing amount of money – I mean, it's over $40 trillion now in some form or fashion – but the fact that the economy in the U.S. is growing at a pretty fast rate, and Germany is expected to continue to do so – it is a very large and dynamic and wealthy country – that's why, at least I personally think I'm not worried about the U.S. going bust any time soon, really.

11:31Right. But yes, if you don't have that growth, or let's say if you're – the costs of servicing that debt, the interest rates that you pay are higher than the rate your economy is growing at, well, then you can see stuff start snowballing. And then you also have a budget deficit on top of that. There's just a lot of things generally pointing in the wrong direction. Is that what's happening in France? A little bit. But France both has a lot of debt. It has a big budget deficit, and it has very little growth. And that's kind of, I guess, the Achilles heel.

12:05So it has some advantages over the U.S., and it has some advantages over other countries as well. France actually is a very wealthy country. But they tax a lot already. Like, it's a high-tax system. The government's fairly big. The U.S. actually taxes very little compared to most other big, rich countries. So it could quite easily get on top of its debt problem if there was political will to do so. So in France, there's both that kind of lack of growth. It's just growing very slowly. And the fact that politically – look, it's not like spending cuts are popular in any country in the world, but they're very unpopular in France.

12:41It's just a political system that doesn't really seem to be very receptive to austerity in any form or fashion, which is why investors are worried. Yeah, they kind of seem to go to the streets. Yeah. I mean, French people – I love the country. I've lived there. But French people strike for fun. I mean, it's just like – it's a national pastime. If you give them actually something to genuinely be angry about, I mean, then, you know, they – Then they strike. They strike, and they like the revolutions as well. So that's why investors are feeling a little bit more worried about those OATs that you mentioned, the French government bond market.

Data center debt issuance

13:14Yeah. So data center bonds. So it seems that most of the data center debt has gone out there in a few forms. There's the direct bonds from the hyperscalers, and then there's a lot of SPV and project financing, which isn't bonds. Yeah. But it seems that – perhaps I'll get to the question. How has data center debt issuance changed all of the bond market? Because I've seen a lot of back and forth about whether it's actually doing stuff or whether it's not really changing. It's kind of hard to tell.

13:48No. I mean, it has transformed the debt market over the past year. Initially, a lot of these big data center investments were financed by – I mean, there were some smaller – these Neo Cloud, you know, like a core weave. They would have issued bonds to do so. But most of the big hyperscalers, the big serious companies we talk about, like Amazon or Alphabet and Microsoft, they'll just pay for it. They make so much money on their other products, whether it's Microsoft Office or YouTube or WhatsApp or whatever, that they don't really need.

14:21And they had very little debt. It's important to remember, they came into this AI boom with extremely little debt, like way more cash than they owed. Way more cash. And they were just printing more cash all the time. But then they were investing so much money that actually the cash they make from their other businesses just hasn't been enough. So it started last year, and this year it's just gone kind of gangbusters. It's, I think, close to $500, $600 billion worth of direct bonds, those kind of bonds you can see trading out there in the market every single day.

14:54And then, as you say, a lot of other stuff. Like, they are definitely getting more creative in how they raise money to pay for these data centers. Right. And so how has that actually changed the market, though? Has it put an effect on government debt or not? That is the debate I was referring to. Yeah. Well, so for investors, it means that, like, the nature of the bond market has changed. So the bond market used to be very dominated, like the corporate bond market for companies, used to be very dominated by, like, big utilities and waterworks and mining companies.

15:29Like, old world, old economy stuff. And the tech sector just didn't really issue bonds because they didn't really need to. They either funded themselves with venture capital, although it was so profitable they never needed to borrow. So the bond market just looks very different from the stock market. The stock market is kind of the mirror image. The stock market is obviously dominated by tech companies and has been for a very long time. The bond market hasn't. So they have rewritten and kind of reshaped the nature of it. To what extent that is affecting and kind of forcing the government's borrowing costs to go up, that's debatable.

16:04Scott Besant, the Treasury Secretary of the United States, argues that it has had a meaningful impact. That there's so much supply of these bonds. These hyperscalers are hitting up the bond market for such enormous amounts of money that it is causing almost like indigestion. And that's raising the cost of borrowing for the US government. And how does that happen? Well, it's just like, if you are an investor, whether it's like me, Robin Wigglesworth, or I'm a bank somewhere, or a pension plan or something, I have a choice in what I invest in.

16:37And I don't have an infinite amount of money. Like the bond market, because it's paying interest all the time, there's always money coming into the bond market. But you don't have infinite amount of money. So if you have the choice between lending to the US government or lending to Microsoft, and you think, well, Microsoft isn't as safe as the US government, but I'm getting an extra half a percent. Let's say if I can lend money to the US government for 5% a year for the next 10 years. But for Microsoft, which is pretty safe, I might get 5.5%. If I lend to Oracle, I might get 6%, 7%.

17:09So you can see it's like a substitution, essentially. But I think people underestimate just how vast the bond market is. I mean, globally, for my book, A Fabulous Debt, I penned around $190 trillion at the end of last year. So we're probably close to $200 trillion now. So, you know, we're still talking about AI hyperscaler bonds of around half a trillion dollars this year. And that's astonishing. That's wild. But we're still talking, what, like three months' worth of US Treasury issuance.

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22:40Yeah, and I specifically wrote about this recently. I think there was an Alphaville piece. I can't remember if you wrote it or not, but it was the, maybe it was Bryce Hill. It was this kind of discussion of whether this is actually what is doing it, when it might actually be the 10-year selling off. So the yield is going up, or the expected yield is going up, is more to do with worries about the U.S. debt and how effectively it's that the markets might think that the U.S. will be paying more interest in the future, or they should take more interest from the U.S. government. I think it is.

23:11Yes, exactly. I mean, it's, I mean, one thing I both love and find incredibly annoying at times with the bond market, it's like an inkblot test, where people can see exactly what they want to see there. Because at any given time, there's like 20 different factors that play in, and with different strengths at different times. And bond yields, like the interest rates that the company or a government has to pay, can go up for both good and bad reasons. Like, if you think the U.S. is in a once-in-a-lifetime economic boom, and the AI is going to be amazing, and it's all gravy, well, actually, in a kind of a booming economy, you don't want to lend money to the U.S. government.

23:48You want to put money in the stock market or anything else that might benefit. Oh, because you'd think it would grow. You'd think that the private businesses would grow. Yeah, private business, you'd just have more opportunities. So, actually, bond yields are going up for good reasons. Like, the economy is booming, and you want that. On the other hand, bond yields can also go up if you're worried about, well, inflation is going to run out of control, that the Federal Reserve, the independence of the U.S. Central Bank is under threat from the Trump administration, that you're worried about the U.S. going bankrupt.

24:19There are all sorts of reasons that can push bond yields up and down for good and bad reasons. Like, if bond yields, like, if the U.S. enters the recession now, bond yields will fall. That's not good news for us. We don't want that. But if bond yields fall because, like, the government's credible, that's a good thing. But that means you can see whatever you want, and you'll have a lot of, basically, narrative games around this. And I think, like, the AI bond boom is probably a factor, but it's only one factor, and it's, like, lowercase f.

24:53There are other things, like the Iran war pushing up the price of energy, and that just flows into inflation almost mechanistically, and that means that central banks have to raise interest rates. That's, like, a far, far bigger factor. Right. That makes sense. So here's another question I have had an email or two about.

Measuring in basis points

25:12So why do they measure it in basis points? So 0.01%. Why do they measure the movement of a treasury bond, for example, in that, or, like, even a general bond, in that small of a measurement? Well, mostly because it just moves in those such small increments. Like, if you are a super junky, crappy company that might go bankrupt imminently, your bond yields might move by a percentage point a day. Like, one day your bond yield is 8%, the other day it's 10%, maybe.

25:45It will move around by a lot. But most bonds, and bonds are kind of mostly issued by, ideally, countries and companies that aren't going to go bankrupt imminently. They move, don't move as much as the stock market. It's arguably why the bond market, despite being far bigger and more important, I'd say far more fascinating than the stock market, it doesn't get the same attention. It just doesn't move around as much. So let's say if the treasury yield falls 10 basis points or 0.1 percentage point in a day, that's a big move for treasuries.

26:19But obviously, it sounds pathetic if you say it is 0.1 percentage point. So we just say 10 basis points. Or if something shoots up by 20 basis points, oh, wow, that's a big move for treasuries. That's because the market is so big and a small movement can really shift things. Yeah. I mean, especially the treasury market, as much as it sometimes annoys me, but even when I sit, I live in Norway these days, and even when I borrow money from my bank here, I'm basically competing with the U.S. government for money.

26:49Like, my bank could always buy a U.S. treasury bond or a Microsoft bond or a French OAT rather than lend to me. So that's why we're all basically in competition for capital in some form or fashion. And that's why the U.S. treasury market, as the biggest, baddest bond market on the planet, basically sets the cost of money in a subtle way, but in a very real way for everybody else. So even if you don't buy treasury bonds, if you don't even have them in your pension plan that most people will have, you will be affected by the ebb and flow of the treasury market.

27:22Because it just flows into, like, the cost of money matters in a thousand ways to so many things. So it will affect your life, whether you see it or not. And that's the 10-year treasury price that generally does that. Yeah, I mean, it's really the whole treasury market. But yeah, the 10-year is just, like, is what we've chosen as the representative, the easy shorthand for the treasury market. And that's a good proxy for the entire global bond market, essentially.

Junk bonds explained

27:50Makes sense. So talk to me about junk bonds. What are we looking at there? Because I hear the term thrown around in general and by Elliott Smith once in the great song. But it feels like it can mean all sorts of things. Yeah, so the bond market, just for reasons of simplicity, is influenced by something called rating agencies. I mean, and these are three agencies. They're called Fitch, S&P, and Moody's. And they basically give grades, like a teacher gives a student grades on their paper.

28:20They give grades to how likely a company or a country or a town or whatever is likely to go bankrupt, to default on its debts. And the best grade is a triple A grade. Like, it's like, oh, wow, you're really good. I'm in Norway. Norway's triple A rated because we're obscenely wealthy from oil. The U.S. used to have a triple A rating, but no longer has one because it has a lot of debt. But, like, then you start getting further down. And below a level called triple B, and these kind of are silly letters, really, but that's what people say, is kind of there be dragons.

28:58So, anything from triple B to triple A is considered investment grade, like, of varying quality, but broadly speaking, extremely unlikely to default. But below that is what people call sub-investment grade or high-yield bonds because they usually have higher interest rates because they're shaky companies. And what you and I typically call junk bonds as a sort of pejorative term, but not always entirely unfair. I mean, they're not junk, but they're big companies there, but they're not as strong.

29:29They don't have as strong financials as, like, a Microsoft or the U.S. government. So, and these bonds, so I know the hedge, was it investment funds or is it pension funds can't hold junk, right? Historically, it used to be so that almost nobody, no self-respecting gentleman, and let's face it, back in the day, it was all men, would buy junk bonds. Junk was actually something you became. Like, you weren't a company that decided to be non-investment grade. You were typically a big company who had hit bad times and got relegated out of investment grade, and they were therefore considered junk.

30:05They were called, the more poetic name is Fallen Angel. I was going to ask you about those, because that happened to Ford during COVID, right? Exactly. It's happened to lots of companies, really, but it used to be a massive thing. Like, if you were a big company and you had issued tons of bonds, typically, but you were so indebted that the rating agency ejected you from the investment grade ratings into, like, double B or below, you were kindly called a Fallen Angel, but quite often saying, oh, you've been junk.

30:37Like, you're a junk bond company now, and that's not something people wanted to do, because all sorts of investors, like you say, weren't allowed to buy that kind of stuff. But that has changed since the 80s. Now there's a vibrant junk bond market, and anybody can really, I mean, there are companies that literally aspire to be junk bond companies, because they think it's more efficient, essentially. Why would it be more efficient to be a junk bond company? Yeah, it's kind of mind-bending, but it's because of the tax treatment of debt.

31:08Like, so you can deduct your interest payments, just as if with a mortgage. So if you're a very indebted company, you can actually run quite a bit of debt. You don't want to be, like, imminently on the verge of bankruptcy every day. I mean, that's just very stressful if you're the CEO. But you can be a very strong junk company, like rated double B. And in that case, actually, you'll see a lot of private equity-owned companies that are quite indebted. So they're junk-rated companies, but they're on the strongest side of it, essentially.

31:40Because actually, there's so much money in that market now, it's not like the back in the day where people weren't allowed to invest. So this was changed by a guy called Mike Milken, who I wrote about in my book. He changed that. He kind of changed the perception that junk was bad. They actually pointed out, well, actually, these companies are forced to pay such high interest rates that even if a few of them do go bust, you still make way more money from investing in these sub-investment-grade companies. So now it's kind of a, dare I say it, almost a bit of a sexy, racy part of the bond market.

32:12Well, I know it picked up during COVID when the government set interest rates to basically zero. Yeah. And because that was the only way to get any yield, I just dug into a lot of this on a recent newsletter, so it's fresh in my mind. But it seems that there is distress in the lowest quality ones, the triple Cs. What's going on there? So triple C is the one just before the ratings agencies basically say you're dying? Yeah. From what I understand. Triple C is kind of the lowest rung, but you're still paying your debts.

32:43It's kind of the rung that you are very likely that you could die. And that's why that's, you'll see triple, junk bonds are actually a really good way of spotting economic distress. Because like the stock market is, as you know, Ed, the stock market just falls in love with dreams and narratives and stories. So they quite often don't realize when there's like deep economic problems bubbling up from below. The junk bond market, because like if you buy a bond, the best you can hope for is getting your money back.

33:15Right. You can never, you can't, you can't make 10x your money, 20x your money, 100x your money in, as you can in the stock market. Everybody dreams of buying Amazon or, you know, I guess like Tesla when it was a teeny tiny company. But like in the bond market, you can't do that. So you're just very exposed to the downside. So bond investors are, as humans, they tend towards pessimism. And the junk bond market is the most vulnerable to economic downturns. So you'll see like little, a little bit of skittishness in the junk bond market before you see it anywhere else.

33:47And the way, the place you see it the fastest is the triple C part of the market. Because those are companies that might survive if the economy stays healthy, but are exceptionally vulnerable because they've got so much debt that like whenever the economy turns, they might very quickly keel over. And that's where we've seen definitely like a bit of skittishness lately.

34:11I'm Melissa Jeldson, and in my new podcast, What Happened to Her, I'm bringing you new stories and conversations every week. Stories about women whose deaths were too quickly ruled a suicide. She was starting to get worried and get scared for her safety. Stories of survival. The only difference between me and her, frankly, was a little bit of luck.

34:43Because by all rights, I should be dead. Cases that everyone else called closed. They can't convict her, right? Like, she has so much evidence. These stories all start in the same place. With a woman failed by a system that didn't believe her, that didn't protect her, that didn't see her. No child should ever experience that. And we were babies. She did all of these brave things and came out and spoke about it, and he got a year. You never know who that devil is because he's wearing a disguise.

35:14Sometimes it's a police uniform. Listen to What Happened to Her on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Lisa, we should tell them about our new show. Oh my god, Lexi. We have a new podcast. It's called Don't Lie to Me. I'm Lexi Iwanu. We're two best friends, 22 years apart, but so close at heart. And I'm Lisa DiGiulio, the old one, which means we have wildly different references, occasionally different opinions. And at this point in my 50s, I've lived it all.

35:45I'm not going to get anywhere fighting. That is wild. I learned that about you today. Now in my 30s, being the founder of New Shoes, Good Taste is my business, and I've always got something to say. If men were just honest about this, there would be so much more peace in the world. We're going to talk about dating, relationships, beauty, getting older, and a little wiser. We're best friends, but we don't always agree. Because you told us how accommodating you are. Obviously, I would do what I think I could do to fight the fight, but there's only so much fight I can fight.

36:19Don't lie to me. Don't lie to me. Don't lie to me. Don't lie to me. Don't lie to me. Don't lie to me. Liar. Listen on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. I don't really care. Blockers. Blockers. Blockers. In Washington, it became the worst thing you could be. And I found six of them. People who devoted their lives to public service, who believed their work mattered, until they were told they no longer belonged. I'm Michael Lewis.

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37:24Vampires. Minotaurs. 12-foot skeletons. And apartment doors? Believe it or not, we're talking about romance. It's a monster romance extravaganza on Radio 831, a romance podcast. So join me, Sanjana Basker, and my co-host Tyler McCall, as we dive into the strange, horny, and wonderfully thoughtful world of falling for something not quite human. I give Tyler a crash course in monster romance, and the villain edit author Rosie Dannen joins to talk vampires, blood play, and finding tenderness in a monstrous love interest.

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38:27Every victim has a voice. But will it be heard? I'm Nancy Grace. On Crime Stories, we go beyond headlines to examine evidence, challenge the story we're fed, and pursue justice for victims and their families. Please join us at Crime Stories with Nancy Grace on the iHeartRadio app, Apple Podcasts, or wherever you find your podcasts. Hope you join us. I'll see you there, friend.

38:58So, just so that I'm following you, because they are the most vulnerable, when things are turning, they're the ones that get hit first. Yes. They are kind of, I mean, to stretch a metaphor, if you're in a movie hall and somebody shouts fire, it's going to be the old people that don't get out of the door quickest. The old and infirm that might not get out of the door in the mad scramble, and that's the CCC companies. So, those are the ones where you can kind of see worries.

39:30They're where they already borrow so much money. They already pay such high interest rates. They have no margin of safety. They have no nest egg. If the economy turns south, they will get hit very quickly. And, yeah, even just bringing up their ratings agency right now, they're dependent upon favorable business, financial, and economic conditions to meet their financial commitments. So, yeah, that's fascinating. I never even thought of it like that, even though it's blatantly obvious. So, here is another thing.

SpaceX credit ratings

40:00Why is it, though, that, say, let's look at CoreWeave, or actually SpaceX is a better example. SpaceX got rated investment grade, despite the fact that it has negative revenue. It lost billions of dollars. How is that possible? Because it seems like the ratings agencies will rate companies that, in their current state, would run out of money just because they could theoretically stop doing something stupid. Is that, what is the logic behind these decisions? Well, it's mostly, and it does get a little bit loopy at times, but it's mostly that SpaceX is valued so highly by the stock market.

40:38So, companies and countries are very different, but companies have something called a capital structure. Like, there's a heriarchy of who gets wiped out. The last people are typically, like, if you're a banker and you've lent to SpaceX, you've typically got all sorts of very fancy covenants in your loan documents. You're considered senior. You will only take a hit if everybody else gets wiped out. And then you have maybe normal bondholders that just have normal securities. Then you might have something, and it varies from company to company, but there'll be maybe some preferred equity or some mezzanine financing, it's called.

41:17But then the first people to get hit is SpaceX, shareholders. So, it's like a cushion. And when you say get hit, what do you mean? As in the value of their shares go to zero? Yeah. So, let's say if SpaceX was to declare bankruptcy tomorrow for some reason, then the equity is worthless. The stock is valueless. And it means that basically then you'll start getting hit and hit, then the bigger the losses, the deeper into the kind of the debt stack things start to eat. It's like house termites eating your house.

41:48They'll start eating the bottom bit first, and the top you'll be fairly shielded. You can get out of the house. As in like, so bondholders would get paid back out of the, or the top of the stack, the senior debt, they would get paid first. Yes. They always get paid first.

42:05Stockholders don't get paid anything at all, really, unless there's a dividend or anything like that. So, the reason why SpaceX, to a large extent, is investment grade, despite having, like, on the face of it, fairly funky financials, is that there's so much value in that equity. It's like the stock market values SpaceX so, so highly that it is almost inconceivable. Like, they have a lot of cushion there, essentially. They can probably always sell more stock. They can issue more debt, so the chances are they will be fine.

42:36Like, the market has given them a big, fat lifeline, essentially. But that can change fairly quickly. I mean, it won't go tomorrow or next year, but the market can also be very fickle about these things. How quickly will a company get re-rated? Is there any kind of standard for that, or is it just if S&P wakes up and looks at something and goes, oh, crap? It's very situational, as it were. Most times, rating agencies check in once a year or twice a year.

43:09Like, they won't check in on the US government once a year because it kind of, we know nothing changes radically there. But they can, they can, so there'll be, like, scheduled reviews for a credit rating. But there will also be, like, if obviously something big happens. A great example of this is Wirecard, a German payments company that proved to have… SoftBank Portfolio Company. Yes, exactly. Another one of SoftBank's favourites. They know how to pick them. But Wirecard ended up, like, proving to be a massive fraud. They had an investment-grade rating and sold a bond.

43:41And actually, there was one bond, I think, that literally went into default before they made a single interest payment. That's very, very rare. That's so cool. I love SoftBank.

Retail bonds in Japan

43:53Well, actually, with that in mind, I had a question about SoftBank. So, SoftBank apparently issues a lot of retail bonds in Japan. What are those? Well, so different markets will have different characteristics. I always joke that the bond market comes in more flavours than Baskin-Robbins. Okay. And, you know, in some countries, like Italy, there's, like, a custom for ordinary Italians to buy bonds at their post office or their brokerage. There isn't that much history of that in the US, but you can buy treasury bonds directly from the US government if you want to.

44:24The government set up a site. You can do it on Robinhood and stuff like that. But most countries, it's not that simple or straightforward to buy bonds. Most bonds are bought by big institutions like a pension plan on behalf of their investors, ordinary people. But in Italy, Japan, there is what they call a retail bond market. There's a fairly big one in Germany as well, weirdly enough. But, yeah, you can because everybody in that country might just be a bit more loyal, feel a bit more comfortable with you. You feel a little bit safer, your household name.

44:56So it's easier for you to fund yourself at home by selling bonds to ordinary investors in your own home country, as it were. But, you know, SoftBank borrows so much money. They borrow in all sorts of currencies around the world, really. And I know that Japan is, well, they're exiting this, but I know one of the reasons SoftBank sells those bonds is because Japanese government bonds have, until recently, not really paid interest. Yes, exactly. So Japan has had extremely low interest rates for really like 30 years until recently, because it had this massive economic crisis and a huge problem with deflation and debt for a long time afterwards.

45:40And so bond yields, and so the central bank just kept interest rates flawed at zero, or even below zero for a period. And that, yeah, if you're a Japanese investor and in your bank account, or even in like a government bond, you basically get zero. You're going to start looking for other stuff that yields a bit more. And that's like a huge boon for companies that want to borrow money. So we've seen a lot of, not just Japanese companies, but a lot of other companies as well, borrow in Japanese yen and then swap the yen for dollars if they want dollars or euros.

46:13And that is the yen carry trade. Yes. So carry is just basically if you borrow money in a cheap country, and that invested in somewhere else where you hopefully make more money on those. So let's say if you can borrow yen at 1% for 10 years and invested in dollars yielding like a dollar bond at 5%, that's like a, in theory, and it's important to stress theory, that's like a 4% premium. But the problem is that currencies move around a lot. So you can easily get wiped out on the carrier trade.

46:44So it's always one of those kind of popular things when the world looks safe and fine, and then it kind of blows up in people's faces when it suddenly doesn't. It's fascinating as well. I was reading a story about those retail bonds a couple of days ago, and how Masayoshi Son, the CEO of SoftBank, has this incredible cult following, partly with sports fans, because there's a SoftBank-sponsored team, but there are regular people that buy the bonds because of Masayoshi Son. It's just a completely different thing than you'd have over here in America, partly because we don't have zero interest rates or didn't for a long time.

47:21And so a company basically steps in almost like a sovereign bond issuer. Yeah. It will just, like, maybe just benefit from low interest rates. But, like, interest rates were pretty low in the U.S. for a long time, and that benefited all sorts of companies there, too. And that kind of investing, not to make financial returns, but almost like an expression of your identity, I mean, that's very much alive in the U.S. Just look at Tesla. Or even SpaceX, right? We were talking about SpaceX. SpaceX is not valued as a normal company. It's valued as, like, by, like, Elon Musk fanboys and girls who will just give him money because they believe in him.

48:00And it is not something that it is entirely divorced and unanchored for any sort of normal financial analysis. It's just what people do. But, like, what people are doing with SpaceX in the U.S. was the stock, I guess. I didn't know this about Japan, but, like, maybe Japanese investors are doing with soft bank bonds over there.

Maturity walls and refinancing

48:21Kind of. Actually, this leads me to my final and most complex question. So, with that in mind of all of the bonds that were raised during the interest-free era in 2020-2021, talk to me about maturity walls. So, how big is the – when I say maturity wall, just for the listeners, it's a bunch of debt bonds that were issued when interest rates were low in 2021, 2020, that are coming up for refinancing. How big a problem is this going to be? Or has this problem already started?

48:53I have to admit, like, maturity walls – so, it's just basically, let's say, if I'm, like, Wiggles Corp, and I've issued, like, a few bonds maturing in different years. So, let's say I have – next year, I only have a billion dollars worth coming due. The year after that, I've got, like, four billion. And then, suddenly, in 2028, I've got, like, ten billion dollars coming due. And look, you'll see this bar chart, and it looks like a wall, which is why people call it the maturity wall. In practice, if you look at almost every big borrower, and certainly, like, a government that issues bonds every year, like, every quarter, some big companies and governments will issue bonds,

49:30it will always look like a wall. So, like, I speak as somebody who's written God knows how many articles over the years about worries about a maturity wall that, you know, always looks scary and could potentially become scary. But as long as the economy is fine, then it's generally fine. But there is a difference now that, of course, some of these maturities are for companies that just, as of yet, don't make that much money. Like, the hyperscale is, most of them, Oracle excepted, still make obscene amounts of money.

50:02Well, Oracle's cash flow negative right now. Yeah. Oracle is in a very weird spot, though, because they are threat. They run the risk of becoming a fallen angel. But I understand what you mean. Yeah, no, Oracle is definitely one that kind of sticks out. All those companies could get in trouble, I guess, in theory. But, like, they'll have to borrow a lot more before I really start freaking out about them. Oracle does look like the thinner leopard in the herd, as it were. And this wall, it could hit.

50:36But most companies, like, it's what we screw up all the time. What people get wrong is, like, the stuff that we know about is very hard to mess up. Like, if you see a big, fat hurdle ahead of you, and you have to know and jump over it, you might, maybe you won't be able to do it. But at least you have time to prep, you can do it. It's not like these companies don't know they have a bond coming due in January 2027, for example. They know they have to plan ahead. And as long as the company is not looking too shaky, they refinance.

51:08Like, most companies don't actually repay their debts. They just roll their debts. And that just means issuing more bonds to pay off the old ones. Yeah. So if Wiggles Corp has a billion dollar bond coming due in January 2027, I'll just, at some point between now and then, issue another billion dollar bond to get the money before that comes due and repays that. And normally that's not that dramatic. The problem is when that maturity rule collides with an economic downturn.

51:38So maturity walls in isolation are very, really problematic. But if a maturity wall either is there, you see it with, like, a company that doesn't generate a lot of cash. So, like, maybe investors won't be around to lend to them. Or does the economy go south at the same time that you have these big payments coming due? Let's say if Wiggles Corp suddenly goes, like, has, like, starts losing lots of money between now and January, well, maybe nobody wants to lend me that billion dollars.

52:08And that's when things can get dicey. So maturity wall is, I always kind of stress that it is not dangerous in isolation. And bond maturities always kind of look like a scary wall and can be made to look like a scary wall. But when it's only primarily causes problems when it actually, that maturity walls happens to coincide with, like, deep economic recessions. And those are, unfortunately, extremely hard to predict. Well, Rob, this has been genuinely wonderful.

52:38I'm going to direct everyone to download and buy and read your book because it's phenomenal. I'm really, genuinely, really excited to have had you on because I think this is a subject that is very soon going to hit the tech industry quite hard. So thank you for joining me. Yes. No, thanks, Ed. I really appreciate it. I definitely think the tech industry is discovering the joys of debt. And quite often after that, people discover the destruction that debt can cause as well. So it's going to be interesting to see how things shake out. Thanks so much for joining me.

53:16Thank you for listening to Better Offline. Thank you so much for listening.

53:47Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com. Or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Thank you.

54:17Lisa, tell them about our new show. We have a new podcast. It's called Don't Lie to Me. I'm Lexi Iwanu. We're two best friends, 22 years apart, but so close at heart. And I'm Lisa DiGiulio, the old one, which means we have wildly different references, occasionally different opinions. And at this point in my 50s, I've lived it all. Now in my 30s, being the founder of New Shoes, Good Taste is my business. Listen on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

54:49I'm Melissa Jeltson, host of the What Happened to Her podcast. We're kicking off the season with the Sandra Birchmore story, a case the police wrote off as a suicide in a snowstorm. Her family never bought it, and the man they suspected wore a badge. You never know who that devil is because he's wearing a disguise. Sometimes it's a police uniform. And you can get access to all episodes 100% ad-free with an iHeart True Crime Plus subscription exclusively on Apple Podcasts,

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55:53Listen to Whatever It Takes with Carly Lloyd and Jenny Taft on the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Do you love golf? If so, you should listen to Three Putt Bogey. I'm Chuck Bryant from the Stuff You Should Know Podcast. And I'm Adam Pranica from a couple of embarrassing hit Star Trek podcasts. And each week on Three Putt Bogey, we're going to get into the bunker and get to the bottom of what is just so alluring and frustrating about the most beautiful game in the world. So whether you're someone who pipes it on the driving range, but freezes up on the tee box.

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