For years tech companies with vast overseas cash reserves have invested their wealth in the short-term debt of other corporations. But now that Apple and other companies are taking advantage of tax reform to bring home cash held abroad, the demand for that short-term corporate debt is drying up. Bloomberg’s Molly Smith reports:
Once the biggest buyers of short-dated corporate debt, Apple along with 20 other cash-rich companies including Microsoft Corp. and Oracle Corp. have turned into sellers. While they once bought $25 billion of debt per quarter, they’re now selling in $50 billion clips, leaving a $300 billion-a-year hole in the market, according to data tracked by Bank of America Corp. strategists.
The reversal is adding pressure to a market already buffeted by Federal Reserve rate hikes. Yields on corporate bonds with maturities between one and three years have jumped 0.83 percentage point this year to 3.19 percent, close to the highest in almost eight years, Bloomberg Barclays index data show. That increase has happened at a faster pace than longer-dated bonds, which tech companies bought less frequently.
For a company that relies on such debt to fund its operations, it’s the equivalent of $4.15 million in extra interest costs each year for every $500 million of debt issued. Many issuers are adapting by selling longer-dated debt, according to Bob Summers, a money manager at Neuberger Berman. But with the tech companies likely to bring home more cash through year-end, the market pains will only get worse, said Richard Saperstein, managing director at HighTower Advisors’s Treasury Partners.
Read more here.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- Is Sheltering in Munis a Safe Bet for Investors Bitten by SALT Caps? - September 13, 2019
- Ginnie Mae (GNMA) Bond Yields - September 12, 2019
- Is Apple Tipping the App Store Scales in its Own Favor? - September 11, 2019