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Corporates wait for investment boost as yields rebound

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Top US companies took a hit to interest income during the pandemic as rates plunged. Now as Treasury yields rebound to pre-pandemic levels, treasurers are seeking a boost to investment returns.

by Nicholas Dunbar & Manpreet Singh

Published: 2 March 2021

The top 25 non-financial companies in the S&P 500 index as measured by cash holdings took a hit on returns as interest rates fell during the pandemic, according to analysis by EuroFinance. The average effective interest rate (EIR), calculated as investment income divided by cash and securities balance at the start of the period, fell to 1.5% in 2020. That compares with an EIR of 2.4% in 2019 and 2.1% in 2018, according to analysis of filings with the Securities & Exchange Commission.

The fall in returns reflects declines in bond yields during the pandemic, driven by a ramp-up of central bank quantitative easing programmes. Companies built up vast hoards of cash to help withstand the pressures of locked-down economies, with cash and equivalents increasing by $52 billion during 2020, while securities investments increased by $88 billion.

By the end of 2020, progress on vaccines began to presage a sharp economic rebound. Treasurers at the companies responded by pivoting from bonds to cash, reducing securities holdings by $17 billion and increasing cash by $8 billion. Much of the increased cash equivalents went into money market funds, analysis of technology companies shows.

In January and February this year, the US Treasury yield curve rose by 50 basis points, almost reaching its end-2019 level, while oil prices hit $60 per barrel, their highest since December 2019. A short-term burst of inflation might be painful for treasurers that held on to large bond portfolios, though not for those that ventured into equities.

Investing in stocks resulted in the highest EIR among the 25 companies, where 6% was earned by healthcare provider Humana. “Investment income was $1.2 billion for 2020, increasing $653 million, or 130.3%, from 2019, primarily due to the $745 million change in fair value of publicly-traded equity securities during 2020”, Humana said in its SEC filing.

Even with the fall in rates, investment returns account for a significant portion of the 25 companies’ income. The annualised interest received was $14.8 billion in 2020, compared to $20.9 billion in the previous year. By contrast with Humana, several companies including Mastercard, Dow DuPont and PayPal, earned close to zero EIR on their portfolios.