[jusonchan]

I'm surprised how this made it into HN front page. Looking up the author, it seems it's someone who graduated in 2018 throwing out his theory about bonds and how it's all a bubble with a nice click bait title.

The reality is very different though. Bonds are how most large companies finance themselves. And when they can issue a bond that people buy for < 5% yield, it's almost like free cash. Assuming in 2027 - Netflix has say conservatively 220M members paying an average of say $11 (which is less than the average price today, not accounting any price increases). That will be a whopping 29B in revenue. Way more than enough to pay off debt + some in a single year. This is even after accounting for a massive spend on making movies. For context Disney+ spent 1B this year and planning to spend up to $2.4 billion by 2024.

[ddeck]

Regardless of veracity of the conclusions, one key issue is that the author is looking at absolute yields, when they should be looking at credit spreads.

They state:

>Higher rates mean higher returns. A junk bond historically hovered around a high yield of 10%. This attracted investors to the bond despite the risk of the company defaulting

Broadly true, but it's the spread above the risk free rate that is important. If US government bonds yield 15% and some BB rated bond yields 16%, one would be unlikely to invest it in regardless of the high absolute yield.

That differential is called the credit spread - the amount you are paid in excess of the "risk-free" rate to take the credit risk of the bond issuer (i.e. the risk that they don't pay you back). The reason BB bonds are at 4% is not because the credit spread is at a historic low, but because the risk free rate is around 1.5%.

Current BB spreads are low, around 2.5%, but not historically so. They were at 2% in the late 90's, at the current level in the mid 2000's, and actually haven't moved a lot in the last 2 years. This earlier period is the time the author refers to when absolute BB yields were ~10%:

Spreads:

https://fred.stlouisfed.org/graph/fredgraph.png?g=q4Up

Yields:

https://fred.stlouisfed.org/graph/fredgraph.png?g=q4UD

Ps: The St. Louis Fed FRED site is excellent!

[zhaso]

Not sure if we're looking at the same thing but I found the author to have had a JD for 14 years and finished his undergrad >20 yers ago..

[jusonchan]

This is my source: https://www.avvo.com/attorneys/91103-ca-victor-look-1755244....

"I came out of school during the Recession of 2018."

[neurobro]

Looks like a typo for 2008, considering "recession" and "over the last 11 years".

[jusonchan]

Looks like that was likely a typo. Seems like the author holds a license from 2008. My key point is about the debt though. I'm sure there are different takes to it, but this is just my own opinion.

[Giho]

I don't understand your criticism thou. Netflix already had 167M paying subscribers in the final quarter of 2019 increasing roughly by 10-20M subscribers each year, so they will probably be up to 220M in year 2023-2024. They are soon there and still have debt. And 220M times $11, I only get to 2.4B, then you also have account for the expenses before you can call it a revenue. As I understand Netflix has a debt of roughly 12B and their operating expenses for 2019 was roughly 17B, so that's also why Netflix need to lend, can easily escalate. I can understand the fear from investor's.

[jon_richards]

2.4B is monthly.