Trump’s Tax Plan and Your Cash Portfolio
When Republican leaders unveiled their long-awaited tax-reform proposal late last month, politicians and pundits jumped on the nine-page document to determine potential winners and losers. The “long-on-promises, short-on-details” nature of the so-called “Trump tax plan” raised more questions than it answered, rendering many predictions little more than conjectures and educated guesses. Even so, there were enough clues to its potential impact on institutional cash portfolios to prompt treasury professionals to re-examine investment strategies for 2018 and beyond. This month’s research report, The Trump Tax Plan and Its Implications for Cash Portfolios, is an excellent starting point for cash managers trying to understand the potential new market dynamics that may be unleashed.
While unknowns such as timing, content and prospects for passage far outnumber the knowns, it’s not too soon to start considering the possible impacts the prospective legislation might have on government bond markets and the creditworthiness of commercial borrowers. Lower corporate tax rates, incentives to repatriate overseas cash, immediate depreciation of capital investments and other lesser-publicized potential changes would have significant impacts on the liquidity, risk and yield equations for cash portfolios.
Among other things, our report takes a close look at possible unintended consequences of major tax-policy changes. For instance, repatriation of overseas cash might have the potential to reduce, rather than increase, demand for US Treasuries as one might expect. Why? Offshore subsidiaries of US corporations often simply invest their retained earnings back in US government and agency securities. If and when the parent companies bring all that cash home, they won’t necessarily reinvest it all in Treasuries. All else being equal, mandatory repatriation of offshore cash hoards could meaningfully reduce demand for Treasuries and lead to higher bond yields.
That’s just one insight offered by our first take on the Trump tax reform initiative. For many others, download the white paper, and watch this space for more commentary as the legislative wheels continue to grind toward new tax legislation in the coming year.