U.S. COMPANIES TRANSFORMED INTO 800LB GORILLA IN BOND MARKET / THE FINANCIAL TIMES

US companies transformed into 800lb gorilla in bond market

Corporate America is ploughing its excess cash into a wider range of assets

by: Eric Platt, Nicole Bullock and Alexandra Scaggs in New York
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Apple, Alphabet and Microsoft are among a host of top-tier US companies that have become a force in the global bond market, as they pump hundreds of billions of dollars into government and corporate debt.

Thirty US companies together have more than $800bn of fixed-income investments, according to a Financial Times analysis of their most recent filings with the US Securities and Exchange Commission.

Their holdings of Treasuries, corporate, agency and municipal debt, as well as asset- and mortgage-backed securities, means they collectively have more firepower in debt and credit markets than high-profile asset managers including AllianceBernstein, Invesco and Franklin Templeton.

“They are asset managers in their own right,” Ramaswamy Variankaval, head of JPMorgan’s corporate finance advisory group, said of the companies.

A reluctance by American multi-nationals to repatriate profits generated overseas has pushed the size of the US corporate cash piles to more than $2tn, a rise of 50 per cent over the past decade and more than double the levels at the turn of the century, according to the Federal Reserve.

The emergence of US companies as a leading investor in corporate debt alongside traditional asset managers comes at a time many in the market express concern about a bond market bubble that could be vulnerable to bursting should inflation and economic growth accelerate.

Corporate treasurers who have piled into bonds appear to be exacerbating the bond market rally, lowering borrowing costs and convincing companies to issue even more debt while rates are low. That trend could rapidly reverse should inflation return, speeding up a sell-off that would send yields sharply higher.

In total, the 30 companies, which include venerable household names like Ford, Coca-Cola and Boeing, have more than $1.2tn in cash, cash equivalents, marketable securities and investments, according to the FT analysis.

While corporate treasurers typically first turn to a deposit in a commercial bank account or an investment in short-term money market funds and time deposits, they are increasingly extending beyond that sector as interest rates have remained near zero for much of the past decade.

The 30 companies have amassed a portfolio of more than $400bn of US corporate bonds, representing nearly 5 per cent of the outstanding market.

They compete for such debt alongside pension funds, sovereign wealth funds and other investors, helping to drive down borrowing costs for corporate America.

Yields on high-quality corporate bonds have tumbled in 2017 to less than 3.1 per cent, the lowest level since last November’s US presidential election.

The willingness to invest in a wider array of fixed-income instruments is also partly a legacy of the financial crisis, when runs on ultra-safe money market funds forced corporate treasurers to pay more attention to how they invest their cash.

“They [the companies] recognise that with all these changes in the marketplace — money market reform, low rates, the evolution of credit risk —, they realise the world is more sophisticated than it was 10 years ago and they can’t simply put money into a money-market account,” said Jerome Schneider, head of Pimco’s short-term and funding desk.

While their effect on capital markets has become more dramatic, companies have taken different approaches to managing their capital. Some, like Apple — which accounts for more than a fifth of the overall cash, cash equivalents and other securities measured by the FT — have built their own teams to manage their capital. Others hire traditional asset managers.

Many have hired “people with sophisticated [financial] backgrounds” to manage these investments”, said Mr Variankaval.