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US tech giants dump treasury bonds as yields rise

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Led by Apple, the five biggest tech companies reduced their government bond holdings to a four-year low while adding mortgage bonds in a bid to protect against inflation.

by Nicholas Dunbar & Anmol Karwal

Published: May 11th 2021

Warning signs of commodity inflation and trillions in new infrastructure spending have pushed long-term yields to a two-year high, prompting treasurers at the largest US tech companies to cut their government bond holdings. After piling into money market funds at the end of 2020, treasurers’ attention is now shifting to corporate bonds and mortgage-backed securities.

Apple, Microsoft, Amazon and Google’s parent Alphabet sold a total of $38 billion in US treasury bonds during the six months before the end of March 2021. In the same period, the same companies increased corporate bond holdings by $22 billion as pandemic-driven fears of default risk receded. In the 12 months since March 2020, bonds issued by investment grade companies like AB InBev, General Electric and FedEx have delivered returns of between 20-30%.

Then, in the first quarter of 2021, Apple bought almost $9 billion of agency MBS. The mortgage bonds, which have an implicit US government guarantee, pay a higher income than treasuries because of homeowners’ option to refinance. As rates rise, this option is less likely to be exercised, boosting the duration and value of the bonds. Additional comfort for treasurers comes from the fact that agency MBS are also being bought by the Federal Reserve as part of quantitative easing programmes.

Meanwhile, Microsoft has been steadily building up a $6.3 billion portfolio of equity investments since 2018. The software giant added about $1.3 billion of equities in Q1 2021, and booked $353 million in realised gains on the portfolio, benefiting as stock markets reached record highs. Far larger mark-to-market gains recorded by Apple on its corporate bond portfolio have not been recognised as income.

The focus on riskier securities versus cash equivalents helped keep Microsoft and Apple in front of the pack when it came to returns. The effective interest rate, defined as the interest income earned on the portfolio divided by its size at the start of the period, was 2.81% and 1.41% for Microsoft and Apple respectively. By contrast, Amazon which held a higher proportion of money funds earned just 0.57%.

A joker in the pack remains carmaker Tesla, which aside from $17 billion of money market funds has shunned traditional treasury investments in favour of digital assets. A $1.5 billion investment in bitcoin that Tesla made in January was worth $2.5 billion by the end of March 2021, in addition to $128 million of gains that Tesla booked when it sold part of the portfolio to demonstrate bitcoin’s liquidity.

“From a corporate treasury perspective, we have been quite pleased with how much liquidity there is in the Bitcoin market”, said Tesla CFO Zachary Kirkhorn. “So our ability to build our first position happened very quickly. When we did the sale later in March, we also were able to execute on that very quickly”.