An Apple a day (and some Corporate bonds) keeps the doctor away

Gold and the Swiss Franc are not the only two “safe haven” assets at a time when emotional eruptions drive the stock market. Many fund managers rely on a massive holding in Apple to keep afloat, but our data shows such defensiveness is not confined to technology darlings like Apple, as we see an increasing appetite for high quality corporate bonds. In fact, the big institutions have increased their holdings in global investment grade corporate bonds by 20% since January.

It is a topsy turvy world when people think companies are a better bet than countries. We are not seeing investors turning to government bonds as people fret about the ability of nations to pay their bills – hardly surprising after the week that Capital Hill just had. The value of global government bonds held by many of the global Custodians, on behalf of their institutional investor clients, started this year at USD 2.55 trillion and is now at USD 2.75 trillion, only a 7% increase.

As the Financial Times ever wise Lex column pointed out this week, the rise in gold can be mainly attributed to retail money – so the big fund managers are not heavily invested in gold. In terms of stock picking, concentration limits mean that funds already own as much of Apple as possible. Also, Apple is not paying a dividend at present. Around 200m shares of Apple are typically held by those institutions who lend. This just recently dipped to 193m or 21%.

Instead, the last 6 months have been all about owning corporate bonds. Investment grade European Corporate bonds are a type of asset gaining in popularity. Since January, funds who lend their shares have increased their holdings by 37%. It is quite interesting that some of the top holdings are near term bonds (under 6 year maturity) issued by somewhat distressed European banks. Unicredit Spa (4.25% 2016), Commerzbank Ag (2.75% 2012) and Banco Popular Espanol (4.25% 2015).

With US companies stuffed full of spare cash like Turkeys in November, it is logical for funds to seek solace in top quality bonds issued by Uncle Sam’s finest blue chip companies. The FT highlights that the average yield on the benchmark Barclays Capital index of US corporate bonds with investment-grade ratings on Wednesday reached an all-time low of 3.42 per cent. We have detected that there has been a 12% increase in holdings in this asset class since January, which equates to USD 15 billion. General Electric (2038) is the only non bank in the top 5 alongside JPMorgan (7.9% undated), PNC Financial Services (6.75% undated), Wells Fargo (7.7% undated) and Goldman Sachs (6.75% 2017).

In the UK, there has been an equivalent 18% rise with utilities top of the list – Scotland Gas Networks (2.317% 2029) and South East Water (2.533% 2041). With an agreed takeover of Northumbria Water by Mr Ka-Shing (quite a fitting name for such a rich man) perhaps bond holders are hoping for an early redemption to make up for the relatively low rate of interest being paid.

The last time I wrote about what securities lending flows have to say about corporate bonds it was to point out, in the spring last year, that they were being used to short sell. Things are very different 12 months on as investors buy into them as the preferred medicine for a troubling equity market.