What Could Billions of Repatriated Dollars Mean for Bonds?
Tax reform has incentivized companies to return their offshore cash to the US. This could create opportunities for US investment grade bonds.
The list of US companies planning to move their offshore cash reserves back home is growing1 — as is speculation about what they will do with that money. Two activities we expect to see less of are bond purchases and bond issuance, which could impact the US investment grade market in a variety of important ways.
Billions of dollars could return to the US
December’s historic tax reform sharply reduced the US tax rate on foreign earnings (from 35% to 15.5% on liquid assets and 8% on illiquid assets), which could lead to as much as $1.5 trillion coming back onshore, according to Invesco Fixed Income estimates.
US companies currently hold around $3 trillion in unremitted foreign earnings, according to our analysis. While estimates vary widely,2 we believe around half is held in illiquid “operating assets” (such as plants, equipment and intellectual property) and the other half is held in high-quality, short-term assets (such as US Treasuries, corporate bonds and asset-backed securities).
Billions of dollars currently held in short-term assets are expected to be repatriated to the US, and that money is likely to be spent in a variety of ways: to honor tax obligations, reduce debt, reward shareholders, increase capital expenditures, pursue mergers and acquisitions, and/or benefit employees. This could have a significant impact on the investment grade bond market:
- Potential impact on short-term bonds. Going forward, we expect companies to purchase fewer short-term investment grade bonds with their overseas cash, as they prepare to bring that cash back to the US. We have already seen some evidence of weaker demand for recent new bond issues.3 However, we do not expect repatriation to lead to wholesale selling of short-term investment grade bonds, partly because companies are eligible to stretch tax payments over several years, giving them time to wait for their bonds to mature before bringing the cash to the US.
- Potential impact on longer-term bonds. We may also see a reduction in the issuance of longer-term investment grade bonds. As companies bring cash onshore, there could be less incentive to issue debt and, therefore, a lower supply of intermediate and longer-term bonds. All else equal, a lower supply of those bonds could cause longer-term credit spreads to tighten.
The net result of less demand for shorter-term bonds and reduced supply of longer-term bonds may be a flatter investment grade yield curve.
Over the longer term, we would expect these effects to fade, as shorter-term investment grade yields appear relatively more attractive over time, garnering investor demand. In the near term, however, we are cautious on shorter-term corporate bonds, for reasons discussed above, and biased toward intermediate to longer-term corporate bonds. We are keeping in mind, however, that future market volatility could provide attractive opportunities on the shorter end of the investment grade yield curve, and we would consider those as potential tactical opportunities.
1 Source: Fortune, “Cisco’s plan to bring $67 billion back to the U.S. could be a major windfall for its investors,” Feb. 15, 2018
2 Sources: The Joint Committee on Taxation, letter from Barthold to Brady/Neal, Aug. 31, 2016; Moody’s, “Corporate cash to rise 5% in 2017; top five cash holders remain tech companies”, Richard J. Lane, Lenny J. Ajzenman; Invesco Ltd.; CNBC.com, “Companies are holding a USD2.6 trillion pile of cash overseas that’s still growing,” April 28, 2017
3 Source: Bloomberg L.P., “Apple cuts back on bond buying in advance of bringing cash home,” Feb. 6, 201
Matt Brill, CFA
Senior Portfolio Manager
Matt Brill is a Senior Portfolio Manager for Invesco Fixed Income. He is responsible for implementing investment grade credit strategies across the fixed income platform.
Prior to joining Invesco in 2013, Mr. Brill was a portfolio manager and vice president at ING Investment Management, where he specialized in investment grade credit and commercial mortgage-backed securities. Prior to that he was a portfolio analyst at Wells Real Estate Funds. He entered the industry in 2002.
Mr. Brill earned a BA degree in economics at Washington and Lee University. He is a Chartered Financial Analyst® (CFA) charterholder.
Senior Client Portfolio Manager
Steven Thompson is a Senior Client Portfolio Manager responsible for client-related activities across the fixed income credit spectrum with a primary focus on investment grade and multi-asset strategies.
Mr. Thompson entered the industry in 1992 and joined Invesco in 2014. He previously served as a product specialist supporting investment grade, high yield, bank loans and quantitative asset allocation strategies at AEGON. He also worked at Bank of America in the US and Europe as a senior securitization professional covering bank loans, high yield bonds and asset-backed securities. While at Bank of America, he was involved with the buildout of the European cash and derivative collateralized loan obligation platform. Mr. Thompson also worked at Wachovia in a similar role.
Mr. Thompson earned BBA and MA degrees in accounting from the University of Iowa. He holds the Series 7 and 63 registrations.
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Capital spending (or capital expenditures, or capex) is the use of company funds to acquire or upgrade physical assets such as property, industrial buildings or equipment.
A flat yield curve is one in which there is little difference in the yields for short-term and long-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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