WASHINGTON: US short-dated bank bonds have been in the line of fire in recent weeks and this selling pressure reflects tax reform, analysts say, rather than a change in traders’ beliefs about the creditworthiness of financials. Companies with large amounts of offshore cash from their global operations placed the money in US government and corporate bonds. Now as the cash appears set to come home thanks to changes in US tax law, the first signs of liquidation are being seen. Many big multinationals invested primarily in corporate bonds and the likes of Apple, for example, were large buyers of short-term bank bonds. Such debt were popular investments for American companies, according to Credit Suisse strategist Zoltan Pozsar. But of late, a number of blue-chips have said they would liquidate savings they had invested offshore after tax reform.
Highlighting a sell-off, risk premiums rose for senior unsecured bonds issued by Bank of America, Citigroup and JPMorgan, according to Bank of America Merrill Lynch analysts. For the 1-2 year bonds cited by BofAML, spreads over government debt widened 13 basis points between February 2 and February 20, according to Bloomberg data. Spreads on all US corporate debt maturing in 1-3 years (including bank bonds) widened 9bp, according to BofAML ICE’s index. Spreads for 3-5 year bank securities widened 13bp. While some pressure on 1-2 year bank bonds has eased since February 20, BoAML expects 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.
