Slowing Of QE Could Be Good News For Corporate Cash Management

By Rob Daly

 

After about six years of quantitative easing (QE) by the US Federal Reserve System the European Central Bank (ECB) and other global central banks, the international credit market is on the verge of major changes that could benefit corporate treasuries if they play their cards right.

Throughout the QE period, central banks have used their balance sheets to muscle out institutional investors from the sovereign debt market. As a result, investors have turned to the primary and secondary corporate bond market seeking returns. Their appetite has been so strong for so long that institutional investors have replaced dealers as the largest holders of corporate debt.

Yet, this “new normal” shows signs of change as the US Federal Open Market Committee (FOMC) plans to start tapering its stimulus policies in May and announced a month later that it would begin tapering once the US unemployment reached 7%.

The era of cheap money could not last forever, and the cost of debt was bound to return to realistic levels. But there is a silver lining for corporate treasuries: Institutional investors are sitting on a large amount of low-return corporate debt, which they will want to swap out for assets with better returns when they rebalance their portfolios.

Just as companies have used relatively cheap money from artificially inflated demand for corporate debt to buy back outstanding company shares, they can take advantage of this buyer’s market in corporate bonds to buy back their cheap debt—making use of the piles of cash many now hold on balance sheet.

Of course, US—and global—central banks will not end their QE policies overnight. Rather, it will be like removing an aircraft carrier from a bathtub without disturbing the water level. It is going to be done with an eyedropper and not a firehose.

 

Global Finance’s eighth annual Treasury & Cash Management Supplement, eBook and App, coming in September, will they investigate how corporations are managing large piles of cash on balance sheet in the inaugural Global Corporate Cash Survey, consisting of data from 70,000 listed companies worldwide. It will feature unique data and analysis on global and regional companies—and how they are managing their cash.