Treasurers hunt for yield as cash holdings return to pre-pandemic lows
The top 25 S&P companies reduced their cash holdings by $27bn since the start of 2021 while ramping up securities investments by $20bn to enhance investment returns.
Treasury teams at the largest 25 S&P companies, as measured by cash and investment holdings, are looking beyond the pandemic. According to filings, these companies reduced their total cash balance by $27 billion to $371 billion at the end of the second quarter, the lowest level since 2019, while increasing securities holdings by $20.5 billion to $789 billion, a four-year high.
Cash ‘was’ King
At the onset of the pandemic, treasurers were seen accumulating record levels of cash and liquid assets amid uncertainty about the disruptions from Covid-19. However, the focus towards liquidity came at a cost for these companies as in the succeeding quarters their investment returns declined to multi-year lows, the average EIR (Effective Interest rate) declined by 100bps to 1.4% at the end of 2020.
A year and half into the pandemic, treasurers are reassessing the risk and return proposition by cutting their cash and cash equivalents balance to $371 billion at the end of the second quarter of 2021, $27.7 billion lower than its 2020 closing.
The contraction was led by industrial conglomerate, General Electric as it slashed its cash holdings by $14 billion taking the metric to $22.5 billion, 38% lower than the start of this year. Following GE was the tech giant, IBM which reduced its cash balance by a massive 44%, or $5.8 billion to $7.3 billion during the same time period. The company had used cash to reduce its debt as well as pay for acquisitions and holds its remaining cash in highly liquid money market funds.
Alongside IBM, electric carmaker Tesla also used its cash to retire its legacy debt as the metric shrank by 16% or $3.1 billion to $16.2 billion in Q2. The company also held approximately 70% of its cash and cash equivalents in money market funds. The company has maintained its eye-catching $1.5 billion investment in Bitcoin.
Meanwhile Visa, GM and UnitedHealth were amongst those who increased their cash position by $3 billion each to $18 billion, $23 billion and $19.8 billion respectively.
Risk-Return trade off
After reducing their cash holdings, treasurers are trying to hunt for returns by taking their investments in securities to a colossal $804 billion, representing 68% of the cumulative cash and securities portfolio at the end of Q2, bringing the mix back to its pre-pandemic level.
Within the securities portfolio, treasurers cut their government bond holdings by $11.9 billion as treasury yields continued to decline, and the Federal Reserve hinted at a taper of its quantitative easing programme. Major selling was prompted by the American technology giants Apple, Amazon, Microsoft and Google’s parent organization, Alphabet as they sold $14 billion worth of government bonds during the last six months.
Amongst others, the card network company Visa also shed $2.7 billion worth of government bonds off its books, taking its holding down by 47% since the start of the year. On the other hand, Pfizer bucked the trend by adding an additional $4 billion as its government bond portfolio stood at $12.7 billion near its 2018 high of $14 billion. Considered the safest, these bonds carried a yield of only 1.26% as measured by the 10 year treasury yield.
The focus of treasurers shifted towards the riskier end of fixed-rate securities like corporate bonds, mortgage and asset-backed securities as they added $18.7 billion and $10.7 billion in the last six months, respectively. These bonds offer higher yields as they carry a risk of default, however, as pandemic related default risk subsided, companies are more comfortable in adding them to their portfolio.
The e-commerce giant, Amazon led the trend by taking its corporate bond holding to an all-time-high of $39 billion, 31% higher than 2020. Following Amazon were its technology peers Facebook and Alphabet who also added $2.2 billion in corporate bonds. While Apple, which holds the highest amount of corporate debt turned out to be the odd one out as it sold $4.3 billion of securities, taking its portfolio to a five year low.
Amongst others, the American health insurance companies, UnitedHealth, Humana and Anthem also increased their corporate bond investments by 9%, 13% and 14% respectively to five year highs.
Along with Corporate bonds, treasurers also ramped up their MBS holdings to $73.5 billion at the end of Q2. The majority of MBSs are issued or guaranteed by an agency of the US government and are also being bought by the FeD under the quantitative easing programme. With only a handful of companies invested in these securities, Apple yet again led the pack with $22 billion worth of MBS as compared to $16 billion in 2020.
Equity bets paying off
At the far end of the risk spectrum, companies like Coca Cola, Bristol-Myers Squibb (BMY), Visa, Amazon and Microsoft have been steadily building their equity investments as their portfolios more than doubled since the pandemic. The results of their early move reaped benefits as they led the pack in terms of returns while equity markets stood buoyant throughout 2021.
Coca Cola and BMY realized equity gains of $103 million and $357 million in the last six months helping them earn 3.8% and 3.7% EIR as of Q2.
You may also be interested in the upcoming talk “The search for yield” taking place on Thursday September 30th at 5:00pm BST, part of International Treasury Management Virtual Week. Speakers will include Pradipto Bagchi, Treasurer of Zimmer Biomet and Coralie Billmann, EMEA Treasurer of Paypal. Registration is free for corporate treasurers.