Milestone Alphabet century bond already under pressure
Alphabet’s historic century bond has shed more than seven per cent of its value in just five months, amid a wider downturn in long-dated debt and increased scepticism on the earnings potential of the US’s so-called hyperscalers.
The sterling-denominated 100-year bond, which the Google owner will not have to repay until 2126, has sold off sharply since being issued in February, before the onset of the Iran war and a slowdown in the ‘Magnificent 7’ stocks took root.
Alphabet sent shockwaves through the City’s fixed income sector when it announced plans to raise £1bn of a bumper $32bn (£23.9bn) bond issuance via a century bond on the London Stock Exchange’s corporate bond market.
The super-long-dated security was the first of its kind from a technology company since the dot com bubble in the late 1990s, when the likes of IBM and Motorola both raised debt on a 100-year horizon. In the UK, only Oxford University, the Wellcome Trust and French energy giant EDF have issued century bonds in sterling.
Century bond swept up in Iran war
The unusual note, which was 10 times oversubscribed at auction, stoked fears that the historic artificial intelligence investment programmes announced by the world’s largest tech firms had become too ambitious. It was also viewed as a shot in the arm for London’s credit market, which has managed to swerve the well-documented difficulties faced by the capital’s stock market.
But it has already come under considerable pressure from the simultaneous cross-currents of the Iran war and big tech slowdown. Since Alphabet issued the coupon, the conflict in the Middle East has caused investors to reappraise their long-term inflation expectations – a major factor in the price the ascribe to long-dated debt.
Yields across developed economies have climbed dramatically since the US’s first strike in late February, including in sovereign bonds. But long-term debt in the UK – especially in the government’s embattled gilt market – has come under particular stress, thanks to Britain’s reliance on imported energy and high electricity costs.
Inflation and high interest rates is particularly damaging to the value of bonds, as investors place a premium them to reflect the higher likelihood of sustained price rises eating into their returns.
“The decline isn’t entirely surprising, a 100-year bond carries extreme sensitivity to interest rate moves,” said Lana Vaselova, a manager at Cbonds, “which is precisely what made it attractive when rates looked set to fall.”
Vaselova added that technology debt as “almost universally lost value” this year, in a sign investors are casting an extra layer of scepticism over their vast AI investment plans. The so-called Magnificent 7 – a group of New York-listed tech juggernauts – have traded flat through much of this year, a dramatic slowdown from a spell of astronomic share price gains over recent history.