Follow the Tech Leaders: Apple became largest corporate bonds buyer

 In Bond Investing

corporate bondsOne of the hottest subjects, in the corporate bonds market, concerns the fact that the tech giants (Apple, Oracle, etc.) have become the largest buyers. As such, you no longer see Apple Watches and IPhones as the lone core activities of Apple. This is a direct result of Apple’s huge amount of available revenue. This has effectively turned Apple’s Cash Management Unit into a veritable “profit generation machine”.

New Players in a Corporate Bonds Market

As noted in Bloomberg:
“Apple Inc., Oracle Corp. and the other tech giants, while hoarding half a trillion dollars in cash, have joined the ranks of the biggest buyers in the corporate debt market, often snapping up as much as half of some bond issues, according to five individuals who are knowledgeable of the transaction details”.
It’s easy to see that these massive tech companies are, in effect, muscling in on a market that, previously, had been controlled by big bond funds. These included; BlackRock, Inc., Pacific Investment Management Co., Fidelity Investments, and Vanguard Group Inc. One of the incentives for these tech leaders is the Federal Reserve holding short-term interest rates at near zero – for a seventh consecutive year. Another incentive has to do with the evaporation of yields from traditionally “safer” investments, like U.S. Treasuries.

Assets are Locked Up Overseas

corporate bondsLooking at Apple, Google, Inc. and Oracle, along with seven of their largest peers, we can see cash and marketable securities holding more than $500 billion. This represents a more than three-fold increase since 2008, according to data compiled by Bloomberg. However, their biggest concern is that much of those assets are locked up overseas. If an attempt was made to send those assets back to the U.S., then they would be subject to U.S. repatriation tax charges.

Rather than lose out, in this manner, these large companies decided to invest in the corporate bonds market. An example of the amounts that were represented by foreign cash and foreign marketable securities holdings would be Apple’s $171.3 billion that was held in foreign subsidiaries. Additional corporate bonds investments include Oracle, with $25.8 billion along with Google’s $11.5 billion invested in corporate debt.

Short Term Investment

Tech giants prefer investing in investment-grade corporate bonds. These bonds will usually mature in 2-3 years. Additionally, most of the investments have been in financial firms, with the bonds of various highly-rated companies being targeted. These companies include; Wal-Mart Stores, Inc., Merck & Co. and Exxon Mobile Corporation. When consulting The Bank of America Merrill Lynch index data, we can see that US corporate bonds effective yield is 1.82 percent, as of June 2, 2016,  as opposed to 0.90 percent for U.S. Treasuries with similar maturities.

corporate bonds 2Corporate bonds market experts have also indicated that, as the competition intensifies for bond allocations, we’re seeing the tech companies approaching other corporate borrowers, so that they can anchor new bond sales or purchase the largest pieces of what’s known as “reverse inquiry.” This has turned out well for the tech companies since the underwriters understand that it will be held until maturity.

The only downside is that the degree to which the tech companies have been buying corporate debt is currently raising concern that, overall, markets could weaken if these tech giants suddenly decide to do something else with their cash.

Sergey Sanko
Sergey had started an IncomeClub after years of being an investment advisor for high affluent investors and managing fixed income securities. He is the lead investment advisor representative and holds a Series 65 license. Sergey earned his Executive MBA degree from Antwerp Management School.
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