An article posted in the Wall Street Journal over the weekend had a seemingly interesting observation. James Mackintosh wrote under the headline “Why Microsoft has Lower Borrowing Costs than the U.S.” A similar topic had come up frequently in recent conversations at Tide Cycle as we parsed the news and developments around U.S. Treasuries. Notably we’ve reviewed the same data as Mackintosh that the U.S. “owes the public $30 trillion” as well as seen the projections from the Congressional Budget Office in March (based on the most current data and policies at that time) that public debt would surpass its highest level in 2029 and proceed to 156% of GDP in 2055. Interest costs are projected to increase alongside commitments – Medicare, Social Security – with revenues (taxes, tariffs) insufficient to offset them. The U.S. also faces an aging population and slowing economic growth (due to demographics and the debt burden).
Compare that with Microsoft – which Mackintosh notes – has $95 billion in cash and $40 billion in short-term debt, positive cash flows and 16% year over year growth in revenues (Q1 FY25) – and you’d think we’re on the same page.
In addition to the financial argument that Microsoft looks to be a better credit risk (and the ratings agencies agree) there is a question of default and rule of law. Notably our current administration has floated the idea of “selective defaults” where the U.S. might choose which bond holders to pay. A chart shared by Torsten Slok of Apollo Global Management, detailed foreign capital flight across Treasury bonds & notes, equities, and government agency bonds in the wake of Liberation Day in April. Foreigners bought Treasuries again in May but were net sellers in June. Foreigners bought U.S. Corporate Bonds in April, May, and June. Further the U.S. is at risk of a shut down as early as Wednesday should Democrats and Republicans find themselves unable to agree on a spending bill. A shut down could result in the U.S. suspending interest payments and further impacting the factors that determine credit ratings.
While corporate law is very clear on debt issuance and its obligations and has clear consequences for failing to meet those obligations, this administration has demonstrated a willingness to operate outside of the law until the law catches up – or even after the law catches up – with minimal consequence or recourse.
Despite all of this (!) Mackintosh executes a series of leaps and stretches to try and find an alternate narrative for his article. How can it be anything but high demand for corporate issuance and low supply along with non-economic investors (index funds and pensions) willing to pay a premium for assuming the illiquidity of owning corporates?
As always, these discussions inform our portfolio positioning as we think about how and where clients are being appropriately compensated for the risks they are taking with their hard-earned capital.