The newly implemented tax bill will allow multinational companies to on-shore “idle” profits which currently reside in off-shore locales below the previous 35% tax rate to 15.5% and below. These profits are not sitting in cash or money market accounts, but invested primarily in U.S. treasuries and U.S. corporate debt. The potential repatriation will result in a selloff in these debt instruments in order to finance additional stock buybacks, increase cash dividends and increase Capex and infrastructure spending.
With over $3 trillion of profits held offshore the amount of fixed income selling by these multinationals will be significant. The top three multinationals, Apple Inc. (AAPL), Microsoft Inc. (MSFT) and Alphabet (GOOG & GOOGL) hold over $400 billion in offshore corporate and treasury debt alone.
In addition to selling their debt instruments there will be a large decrease in future buying demand as these multinationals will not be adding to their portfolios as existing debt holdings mature and do not need to be rolled over. Selling pressure and a decrease in buy side demand will eventually force bond yields up and bond prices down. Fixed income ETF activity will be a weather vane for this activity as price moves in the underlying holdings of these large fixed income ETFs will paint a broader picture multinational corporate cash repatriation. Activity in the varied ETFs will capture the gamut of selling in high yield corporates, investment grade corporates and U.S. treasuries.
So far in 2018, by looking at both long and short activity in the 29 fixed income ETFs with AUM’s over $5 billion (to ensure diversified holdings) we see a trend of domestic fixed income ETF outflows and increased short selling coupled with international fixed income ETF inflows and short covering.
If multinational corporation cash repatriation hits expected levels we can expect to see negative price pressure on U.S. corporates and treasuries. Due to less elasticity in the debt/equity asset allocation mix of most investors and portfolio managers we will probably see less selling on the long side as they continue to maintain their macro Beta exposure. But we should expect more debt related short activity as traders chase new Alpha plays brought about by multinational corporate selling. As a result, the nominal AUM’s of these fixed income ETFs may not change dramatically, but short interest should increase substantially.
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Managing Director Predictive Analytics, S3 Partners, LLC
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