What investors need to know

00:08 Jared Blikre

Yes, Google’s parent company Alphabet is just tapping the bond market with a 100-year time frame.

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No joke, this bond is not going to mature until the year 2126, and the wild part is investors could not get enough of it.

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On today’s stocks in translation, we’re breaking down what this so-called century bond actually is and why a company that’s drowning in cash, why they would want to borrow in the first place.

00:38 Jared Blikre

So Alphabet is raising about $32 billion across multiple bond deals in multiple currencies, and only a smallish part, 1 billion British pounds is for 100 years.

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But let’s back up a minute and add some context about the difference between stocks and bonds.

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So, stocks are ownership, bonds are a loan.

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With a stock, you own a slice of the company.

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You buy it with the hope that the stock price goes up and maybe the company pays you a dividend.

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With a bond, you’re lending to the company money, and they pay you interest until the maturity date is reached, and then they pay you back the original amount, and you get to keep all the interest.

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Now let’s talk about who buys something like this.

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Some buyers like pension funds and insures want steady payments for a very long time.

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Their promises to pay people last decades.

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So guess what?

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They like investments that last decades.

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Other buyers are just making a big clean bet on interest rates, hoping to buy low and sell high or vice versa.

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And why would Google’s parent company want to go into debt when they’re neck deep in cash anyway?

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Because AI is turning tech into a hugely expensive infrastructure buildout, and even cash-rich cash-rich companies like to have cheap, flexible funding while late rates are historically low.

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Okay, so quick history break right now, because century bonds, they are not anything new.

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Way back in 1993, Coca-Cola did a 100-year bond, and so did Motorola in 1997, which was the last time a tech company played the century game.

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The government of Austria, they also sold one in 2017.

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And if you really want to melt your brain, the UK issued perpetual bonds called consoles starting in 1751, with no maturity date, ever.

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So, here’s the thing to really wrap your head around.

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It might not come right away, but if you can get this straight, you can talk bonds all day with the best of them.

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And what I’m talking about is how a bond’s price and its yield always move opposite each other.

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Let’s use Austria’s 100-year bond going back to its start in 2017.

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We’ve got the bond price in white and uh the interest rate in green.

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So, notice the mirror image.

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In fact, that’s the only thing that you really need to concentrate on.

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When the price line goes up, the yield goes down.

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And when the price goes down, the yield goes up.

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This is a seasaw.

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And here is why this happens like clockwork.

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Let’s say a new bond is issued at a certain interest rate, maybe 5%, and with a maturity of 10 years.

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Then let’s say other 10-year bonds are issued with higher rates, like all the way up to 10%.

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Well, our original bond that’s only paying 5%, while these others are paying 10%, they don’t look that attractive.

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So the price of the bond starts getting cut until buyers feel like they’re getting a good deal.

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A rough rule of thumb is, if yields double, then the price of the bond can actually get roughly cut in half.

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It’s not perfectly like that, but that’s a very good starting point.

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Okay, what do we look out for next when it comes to big tech and big bond offerings?

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First, we want to watch demand on similar long-term tech bond offerings.

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Are these deals getting upsized or are they getting cut?

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Then there’s pricing.

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Is the extra yield that investors are demanding beyond safe government bonds, is that shrinking or is it growing?

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And then there’s a narrative.

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Does AI stay in buildout mode or do we start seeing AI turn into real revenue?

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That answer can determine who wins in both the stock and bond markets.

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And remember that the pick and shovels trade of the dotcom boom, which was a huge build out of fiber optics, those cash-rich giants didn’t get the huge upside, but they did share in the long, deep downside.

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Something to think about with Alphabet.

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And tune in to the Stocks and Translation podcast for more jargon busting deep dives.

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New episodes can be found Tuesdays and Thursdays on Yahoo Finances’ website, or wherever you find your podcast.