Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

U.S. companies have become one of the biggest buyers of their own bonds, creating a new dynamic for a market that has been traditionally dominated by insurers, sovereign wealth funds and endowments.

This trend has been going on for a while, with Apple Inc. amassing a huge stash of company debt by itself, as Bloomberg News highlighted earlier this year. But the iPhone maker is not alone, and it appears that companies have been amassing a substantially growing pile of these notes over the past few years. 

In a research note this week, Bank of America Corp. researchers laid bare the degree to which Corporate America has been eating its own cooking, namely by buying the bonds that companies sell. Two dozen big U.S. non-financial companies now own $376 billion of corporate bonds as part of the "cash" they're holding overseas to avoid paying taxes to bring the money home, according to analysts led by Hans Mikkelsen.

Hoarding Credit
Big U.S. companies have substantially boosted their corporate-debt holdings in recent years
Source: Bank of America Merrill Lynch researchers, filings

Or, looking at it another way, some 37 percent of the money that's often referred to as offshore "cash" is being held as corporate debt. This is an important dynamic for the $2.4 trillion of U.S. investment-grade bonds that mature in five or fewer years, which is most likely the majority of these companies' investments, according to Mikkelsen's approximations. These companies have become a dominant buyer of these notes. 

Now, however, many analysts are expecting some sort of change to the tax code that would make it cheaper for these companies to return this money to the U.S. That would ostensibly spur corporations to perhaps liquidate the underlying assets to pay for acquisitions or share buybacks, or perhaps simply not reinvest the proceeds. That would diminish a big source of demand for the debt, potentially causing shorter-term corporate yields to rise.

Persistent Gap
Yields on shorter-term debt have remained persistently low relative to longer-dated notes
Source: Bank of America Merrill Lynch index data

As is, shorter-term U.S. company bonds yield remarkably little relative to longer-dated notes. In fact, despite compression in yields throughout various ratings and maturities of credit, the gap between yields on longer and shorter-term top-rated investment-grade debt has remained stubbornly wide. 

This very well could change should there be a shift in tax policy. Big U.S. companies have become a large enough player in this corner of the credit markets that any incremental unwinding of their balance sheets could become a significant risk.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net