Something odd has been happening to short-term bank bonds.
So far this month, spreads on banks' two-year bonds have widened by more than 15 basis points, according to Bank of America Merrill Lynch. For all US corporate debt maturing in 1-3 years (which includes bank bonds), spreads have widened 8bps, according to BofAML ICE's index. Spreads on three-year and four-year securities have widened by about 11bps and 12bps, respectively:
This is more likely a sign of selling from big multinational companies, rather than a change in traders' beliefs about bank creditworthiness. Many multinationals had said they would liquidate savings they had invested offshore after tax reform. Companies that invested primarily in corporate bonds, such as Apple, were large buyers of short-term bank bonds, Zoltan Pozsar wrote in a note last month.
Bank of America strategists wrote in a note today that they expect the short-term funding pressures to continue:
The other aspect of overseas cash repatriation we have pushed for this year is that financial markets are losing one of the biggest providers of funding in the front-end... We think liquidations the past two weeks of 1-3 year paper in the corporate bond market is to some extent driven by this story. We are also seeing stress in the commercial paper market, 2-year swap spreads and LIBOR-OIS and one of the drivers we think is the overseas cash repatriation story... We continue to expect wider credit spreads in the front end of the curve.
Maybe companies are going by the two-year timeline estimated by Pozsar.
We likely won't get a clearer view of tax reform's implications for corporate leverage until multinational companies' debt reaches maturity. Multinational companies aren't yet buying back debt with their cash, as BofAML observes. But most analysts didn't expect them to do so (at least not for a while). If companies retire their debt as it matures then these sales of accumulated corporate bonds would be a wash for leverage. If, however, multinationals end up refinancing their existing borrowings even as they sell down their savings held in offshore subsidiaries, that would increase their leverage.
Some companies (like Apple) will give a clearer picture of its capital plans next quarter. But we have gotten hints from others in their earnings calls, handily summarised by BofAML in their note.
A few notables include:
Amgen: "As we deploy our excess capital in the most efficient manner over the next several years, we could find that it is prudent to pay some upcoming debt maturities in cash rather than refinancing in the market."
Coca-Cola: "Since we are already operating within our target net leverage range, we intend to use approximately $7bn of our cash held overseas to repay gross debt."
Johnson & Johnson: "We have $16 billion of cash... what we've already estimated is that roughly in the neighborhood of $12 billion of that will come back immediately... So we'll no longer need to borrow for U.S. purposes, and then the balance of that will immediately pay down debt."
Visa: "During the quarter, we returned $1.8 billion of non-U.S. cash back to the U.S. We are working on additional actions to further reduce our offshore cash in fiscal year 2018."
