The Hater's Guide To Bonds With Rob Wigglesworth

Hello and welcome to Better Offline, I'm your host Ed Zitron.

What's up Offline?

Now, 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. But 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 that can be treasury bonds issued by the US government. They could be gilts issued by the UK government. In Germany, they issue bunds. 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. Because the stock market doesn't actually finance that much. It's really mostly

a way for investors to cash out. But if I'm IBM or Microsoft and I 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 trésor or OATS.

Anyway, sorry. Moving on from that one. No, so.

And you have to be a corporation to issue a bond or a sovereign nation, right?

Well, 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 US, actually, you have this insanely huge and vibrant municipal bond market that 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. 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 because they have contacts and the Rolodex have 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 US is, I think, four or five 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 US treasury bond or even a German bond or a UK gilt. Or in France, like some OATs. 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?

Yeah. 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's going down the drain and you don't want to buy 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 a hundred, like $ 1 worth of bonds for $ 1. You're buying $ 1 worth of bonds for $ 1 and 10 cents, 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. Exactly. That's it. Oh, okay.

Yeah.

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. So 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. And the riskier the bond, there's less risk.

And the higher the yield, the more risk there is, and the more chances 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.

So right now, the thing in the news, as you're well aware, is that the 10-year dated US Treasury, so 10-year long loans to the US government, they are selling off, which means that the effective interest rate is higher. Why is the 10-year so important? Why not the five-year or the two-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. That was the longest maturity of treasury bond that the US 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 US, 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. A 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 pears to look at Germany versus the US, but at least you can kind of compare 10-year yields. So that's what most people do.

So I've seen a lot in the news about how the US has a deficit right now, as in they're spending more than they're bringing in, so they have to issue lots of debt.

I know it's kind of a silly, obvious question.

Why is that such a problem if the US 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 bases it. As much as the US 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 US 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 US going bust anytime soon, really.

Right.

But yes, if you don't have that growth, or let's say if 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. So it has some advantages over the US 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 US 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. 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. It'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 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. 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. 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.

No, I mean, it has transformed the debt market over the past year. Uh, initially a lot of these big data center investments were financed by, I mean, there was some smaller, these Neo cloud, uh, like a core weave. They would have issued bonds to do so, but most of the big hyperscale is the big serious companies. We, we talk about like, uh, Amazon or Alphabet and, uh, 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. And 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 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 five, $ 600 billion worth of direct bonds, these kind of bonds you can see trading out there in the market every single day. And 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, like 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. Scott 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. And I don't have an infinite amount of money. Like the bond market, because yeah, 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 and or lending to Microsoft and you think, well, Microsoft isn't as safe as 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%. So 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 pended around $ 190 trillion at the end of last year. So we're probably close to $ 200 trillion now. So 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, three months' worth of U.S. Treasury issuance.

So it's big, and it's having maybe an impact on the edges, but I don't agree that this is what's driving up the U.S. government's borrowing costs, as Scott Bassett seems to occasionally imply. Yeah.

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 Allen.

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 US government. I think it is. Exactly.

I mean, it's, I mean, one thing I both love and find incredibly annoying at times with the Bodmark, 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 good and bad reasons. Like if you think the US 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 US government.

You want to put money in the stock market or anything else that might benefit. Oh, because you think it would grow. You'd think that the private business would grow. Yeah, private business. You just have more opportunities. So actually, bond yields are going up for good reasons. 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 US central bank is under control. threat from the Trump administration, that you're worried about the US going bankrupt. There 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 US enters a 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, 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 there 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. So 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. It 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 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. But 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 US government for money. Like my bank could always buy a US 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 US 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, even 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 because it just flows into, like the cost of money matters in a thousand ways to so many people.

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 years just like it's that 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 Makes 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 Elliot Smith once in a 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. 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. They 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 US 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. It's kind of there be dragons. So 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 they 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. 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. They 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're 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, 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. So you can deduct your interest payments just as 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 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 BB. 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 stronger side of it, essentially. Because 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.

Well, 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 the So triple C is the one just before the ratings agencies basically say you're dying.

Yeah. I mean, triple C is kind of the lowest rung, but you're still paying your debts. It'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.

Yeah.

Because 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 deep economic problems bubbling up from below. The junk bond market is like, if you buy a bond, the best you can hope for is getting your money back. Right.

You can't make 10x your money, 20x your money, 100x your money 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 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 a little bit of skittishness in the junk bond market before you see anywhere else. And 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 whenever the economy turns, they might very quickly keel over. And that's where we've seen definitely a bit of skittishness lately.

So 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 infirm that might not get out of the door in the mad scramble. And that's the triple C companies. So those are the ones where... you can kind of see worries 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 on 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. Why 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.

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. So companies and countries are very different, but companies have something called a capital structure. Like there's a hierarchy 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 bond holders 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. But 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. uh and 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 they'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 uh stockholders 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 cycle. The stock market values SpaceX so highly that it is almost inconceivable.

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. 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. They won't check in on the US government once a year because they're 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. SoftBank portfolio company? Yes, exactly.

Another one of SoftBank's favorites. They know how to pick them. But Wirecard ended up proving to be a massive fraud. They had an investment grade rating and sold a bond. And actually, there was one bond, I think, that literally went into default before they made a single interest payment. That's very, very rare.

Yeah. That's so cool. Well, 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 flavors than Baskin-Robbins. Okay. And, you know, in some countries like Italy, it'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. The 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, feel a little bit safer, a household name. So 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 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. And 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.

And that is the yen carry trade. Yes. So carry is just basically if you borrow money in a cheap country and they're invest it in somewhere else where you hopefully make more money on those so let's say if you can borrow yen at one percent for 10 years and invest it in dollars yielding like a dollar bond at five percent that's like a in theory and it's important to stress theory that's like a four percent premium but the problem is that currencies move around a lot so you can get easy get wiped out on the carrier trade so it's always one of those kind of popular things when the world is 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. And so like 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 US 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 US. 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. And it is not something that is, it is entirely divorced and unanchored for any sort of normal financial analysis. It's just what people do.

But like what people doing with space X in the U S was the stock, I guess I didn't know this about Japan, but like maybe Japanese investors are doing with a soft bank bonds over there.

Kind of, I 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. When I say maturity wall, just for the listeners, it's a bunch of 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?

I have to admit like maturity wars. So it's just basically, let's say if I'm like Wiggles Corp and I've issued like a few bonds maturing at 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 4 billion. And then suddenly in 2028, I've got like $ 10 billion 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, it 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 except, still make obscene amounts of money. Well, Oracle's cash flow negative right now. Oracle is in a very weird spot, though, because 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 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, um, this wall, it could hit, uh, but most companies like it's what we screw up all the time. What people get wrong is, 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, 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. 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 wall collides with an economic downturn. So maturity walls in isolation are very really problematic. But if the 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 just the economy goes south at the same time that

you have these big payments coming to you. 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. And that's when things can get dicey. So the 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, or primarily causes problems when it actually, that material wall happens to coincide with like deep economic recessions. And those are unfortunately extremely hard to predict. Well, Rob, this has been genuinely wonderful. I'm going to direct everyone to download and buy and read

your book because it's phenomenal. I'm really excited.

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.

Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio projects at mattosowski.com.

M-A-T-T-O-S-O-W-S-K-I dot com.

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Thank you so much for listening. Better 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.

The Hater's Guide To Bonds With Rob Wigglesworth

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