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.
Outlook
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.
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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.
This article has been republished with permission from Invesco Powershares.