Today just after 1pm, Apple unveiled that as part of its capital investment plan over the next 5 years (which aims to spend $30 billion and create 20,000 jobs in the US), the company expects to make a $38 billion tax payment to repatriate some/all of its offshore cash.
The news coincided with an abrupt reversal in 10Y Treasurys, which sold off…
… accelerating the ramp in stocks, slamming gold and at the same time put in a bid for dollars, halting the greenback’s latest pounding, which earlier in the day had tumbled to three year lows.
And while many – including us – speculated that news of the Apple repatriation was the catalyst for this sharp intraday reversal, Morgan Stanley’s rate strategist Matthew Hornbach confirmed that was indeed the case, in his Wednesday EOD market commentary, to wit: “News about Apple’s repatriation plan fueled a sell-off in USTs led by the 7y point.”
Even so, the market’s reaction to the Apple news left quite a few rates strategists, Hornbach including, puzzled. puzzled: “We don’t find the sell-off warranted by the headline since Apple’s marketable security holdings have a short maturity and are concentrated in corporate bonds.“
He explains further:
By 8:00 AM New York, 10y yields were unchanged from the London open at 2.56%. Strong industrial production data at 9:15 AM failed to push yields higher and 10y yields hit the session low of 2.54% shortly before 11:00 AM. From there, rates were in the 2.55% to 2.56% range until a Bloomberg headline hit the tapes at 1:02 PM about Apple expecting a tax payment of $38bn for planned repatriated earnings.
It was not clear over what period Apple planned to repatriate earnings, but the headline fueled speculation that the firm might have to sell some Treasury and corporate bond holdings to pay the tax liability, leading to a sell-off in UST yields for the rest of the afternoon. It is not clear to us that the headline warrants a sell-off since
- According to Apple’s 10-K filings the “maturities of the Company’s long-term marketable securities generally range from one to five years.” That is, the best guess about the average maturity of their UST holdings would be 2.5 years. Yet, the sell-off was led by the 7y point and the 2s7s curve steepened by 2.5bp from the time the data was released until the close.
- Apple holds $55bn of Treasury securities compared to $152bn in corporate securities. So, it is not clear why UST yields sold off, while corporate spreads barely widened on the news. That is particularly puzzling since USTs constitute 15% of Apple’s assets, a value that is roughly in line with the share of USTs in their assets since 2010. Corporate bond holdings however have increased from 23% in 2010 to 41% in 2017, so it could be argued that Apple would be more inclined to sell corporate bonds to free up any needed cash.
Another aspect of the market reaction to the headline that is puzzling is the strengthening of the US dollar. “Offshore cash” or unremitted earnings do not have to be physically offshore and can be invested in US dollar securities such as US Treasuries and unrelated corporate equities and bonds according to the tax code. As a result, unless Apple and other firms with unremitted earnings were intentionally running an unhedged short USD position that they now intend to close out, there should be no impact on the US dollar.
In other words, the market was responding as if the algos reacting to the AAPL news were programmed by 22-year-old math Ph.D. who had no idea what they were doing. In other words, perfectly inefficiently.
So will Morgan Stanley’s explanation be sufficient to send yields lower, the dollar sliding, bond spreads surging and reverse much of today’s market spike, all of which took place in erroneous response to the AAPL repatriation announcement? Of course not.