US tech giants sold bonds as yields soared
Led by Amazon, six largest technology companies reduced their bond portfolio by $37.3bn in the first quarter as yields rose ahead of Federal Reserve plans to unwind its $8.4 trillion portfolio
Treasurers at six US tech giants – Apple, Amazon, Alphabet, Microsoft, Facebook and Oracle – reduced exposure to treasury bonds, corporate bonds and mortgage backed securities by $37.3 billion in the first quarter as surging inflation threatens their $565 billion portfolio.
With approximately 80% of securities investments in bonds, the six companies suffered unrealised mark-to-market losses of $13 billion in the last quarter. They risk taking a significant hit to their income if they sell bonds before maturity but many now are shifting capital to money market funds to capture the rise in interest rates.
Bond rout
To support financial markets and the economy during the pandemic, the Federal Reserve more than doubled its asset portfolio of mostly Treasury and mortgage securities to a mammoth $8.4 trillion.
Now as inflationary pressures grow, the Fed has started to increase benchmark rates and unwind its bond holdings thereby putting upward pressure on yields. So far this year, 10-year US treasury yields have risen by 140 basis points. However, if these actions aren’t enough to stave off inflation, this could lead to an upside shock to interest rates resulting in further fair value losses on bonds amassed at lower yields.
For the third successive quarter, the six companies continued to sell government bonds, reducing holdings by $20.1 billion in the first quarter, taking the total holdings to $204 billion, lowest since 2016.
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Microsoft, which is the largest holder of government bonds amongst tech firms, sold $11.8 billion of treasury securities in the first quarter, taking its total holdings to a seven year low of $80.5 billion. While Amazon reduced government bonds by almost half to $2.66 billion. Meanwhile, Google’s parent company, Alphabet and Apple followed suit with a 5.3% and 3.5% decline in their government bond holdings to $50.48 billion and $55.13 billion, respectively.
In search for higher yields, treasurers were previously seen shifting capital from treasury bonds to corporate bonds and Mortgage/Asset backed securities (MBS/ABS). However, in the first quarter of 2022, treasurers reduced both these securities by $14.3 billion and $2.8 billion respectively.
Amazon led the trend by reducing corporate bonds by 52% or $18.7 billion to $17.09 billion in the first quarter while it also halved its MBS portfolio to $3.8 billion.
The network infrastructure company, Oracle which only invested in corporate bonds, shrank its portfolio by 86% to only $715 million, in the first quarter. Just three quarters back, the treasurers at Oracle had invested $21 billion in corporate bonds.
Meanwhile Apple and Alphabet bucked the trend as their corporate bond holdings marginally increased to $36.6 billion and $95.97 billion respectively.
Falling returns
Selling bonds before maturity during a rising yield environment comes at a cost. When yields rise, prices of bonds fall and as treasurers sold bonds during the first quarter, they realised $567 million in losses on these investments, resulting in the annualised average Effective Investment rate (EIR) to decline by 47 bps to 0.58%.
Alphabet recorded a $231 million loss from debt securities sold. Despite higher interest income received during the quarter, realised losses of $74 million from equity investments further pushed its annualised EIR lower by 157bps than the previous quarter to only 0.28%.
Apple’s EIR deteriorated by 22 bps to 1.28% as it realised a $54 million loss from bonds sold during the first quarter. While Amazon and Microsoft recorded a $15 million and $6 million loss from bonds in the same time period.
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Unlike other companies, Oracle consolidates realised gains and losses from bonds with other investments including equities and pension plans but EuroFinance estimates the loss to be approx. $261 million as the company sold nearly $4.57 billion of corporate bonds during the quarter.
Although treasurers sold only 9% of their bond portfolio in the first quarter, majority of the investments are still in treasury and corporate bonds, on which treasurers hold $13.1 billion of unrealised loss as of March 2022, only to be realised if these assets are sold before maturity.
Furthermore, based on the disclosures regarding sensitivity of bond portfolios to interest rates, EuroFinance estimates Microsoft and Meta’s unrealised losses to further expand by $1.4 billion and $350 million since the start of the second quarter. These estimates are calculated using a weighted average increase in treasury yields, where weights are based on the maturity profile of investments in bonds.
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Positioning for higher rates
As treasurers move out of bonds, they want to compensate for the losses by being able to fully tap the upsurge in short term interest rates and money market funds (MMF) have emerged as an investment which can provide this exposure. In Q1, treasurers increased money market fund holdings by 10.2% or $5.5 billion to $59.5 billion.
As treasurers at Oracle depleted the corporate bond portfolio, they shifted $7.05 billion to money market funds, taking their total exposure to $12.87 billion. Amazon also followed suit with a 17.5% or $3.54 billion increase in MMF holdings to $23.8 billion at the end of the first quarter.
Meanwhile Apple bucked the trend as MMF holdings reduced by a third or $3.9 billion to $7.65 billion.
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