In a neat story, Katy Burne at WSJ reports that Google is putting some of its epic cash pile to work on assets tied to auto loans:
The Mountain View, Calif. company has plowed hundreds of millions of dollars in recent months into asset-backed securities, tied largely to automobile loans and consumer credit-card payments. Among Google’s recent purchases: triple-A-rated debt from car makers Honda Motor Co. and Hyundai Corp. Google had previously restricted itself to U.S. Treasuries, high-quality corporate bonds and other low-risk securities.
Google is wrestling with the same issues bedeviling everyone with cash these days: cash doesn’t yield jack squat.
Yields on US Treasury bonds are famously at historic lows. Currently the 10-year US government bond yields 1.5956 per cent, meaning Google would only be getting $1.59 per year for every $100 it invested in them.
As you can see, this is lower than at any point in history, pretty much.
High quality corporate bonds? Same deal.
So you can see the appeal of going into more exotic areas.
The auto portion of an ABS index compiled by Barclays has returned 2.34 per cent this year on deals with an average maturity of just over two years. That compares with 0.30 per cent for comparable Treasuries this year.
As The Economist’s Greg Ip adds on Twitter, this looks like the “portfolio balance effect in action.”
The premise behind the portfolio balance effect is that the Fed, through QE, artificially removes available supply of safe-haven Treasuries, thus forcing cash like Google’s into fixed income assets in the private sector.
Even beyond the Fed, the fact of the matter is that the whole world is rushing into fixed income securities (be they government or high-quality corporate) and the chase for yield is pushing all kinds of companies with cash to look in unusual places.