As rates rise, the biggest buyer of stocks may back off

Bond yields have been ticking higher recently, and the real move in rates could just be getting started. If so, the biggest buyer of stocks may have to take a step back.

Apple raised $8 billion from the bond market Wednesday, in order to finance its massive dividend and buyback program. This even though the tech giant holds $33 billion in cash, cash equivalents and short-term marketable securities on its balance sheet.

Of course, much of this cash is held overseas, which means Apple would have to pay taxes in order to return the money to U.S. shores. And with the world’s biggest company only paying out yields of 2 percent on five-year bonds, 3.2 percent on 10-year bonds and 4.4 percent on 30-year bonds, the cost of generating cash is low indeed.

Apple is the hardly the only company that’s borrowing to buy back. In late April, Oracle sold $10 billion worth of bonds to fund share repurchases and buybacks, including 40-year notes that went off with a yield of just 4.4 percent.

Companies announced $168 billion in buybacks in April, according to TrimTabs, which is a new monthly record. TrimTabs’ Charles Biderman complained earlier this week to CNBC that corporations have been the only marginal buyer of U.S. stocks of late. And purchases by companies are expected to outpace the inflows provided by ETFs, foreign investors and mutual funds combined in 2015, Goldman Sachs has forecast.

Read More Buybacks are strong, and may get stronger yet

Low bond yields are known to support stocks by making them more attractive relative to their famous competitor, fixed income. As Federal Reserve Chair Janet Yellen said Wednesday, “I would highlight that equity-market valuations at this point generally are quite high,” although “they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low.”

But in the past few years, by reducing the cost of borrowing money and thus making it easier to buy back shares and issue dividends, low yields have also supported stocks in a more roundabout way,.

Indeed, even if a company uses cash and not debt to return capital to equity investors, low rates still serve as a powerful rudder for the programs. Because while buybacks and dividends increase a company’s leverage—leading Moody’s to issue a warning about the capital return trend—low rates reduce the risk of defaults, keeping debt costs low and ameliorating bondholders’ day-to-day concerns.

Read More Moody’s to CEOs: Think twice before buying back stock

Yet over the past few weeks, rates have moved considerably higher. And most investors expect them to advance further still once the Fed raises its short-term interest rate targets.

“If the cost of capital goes up, it doesn’t exactly make it more attractive to return that capital to shareholders,” said Andrew Burkly, head of portfolio strategy at Oppenheimer. Still, he adds that rates rise as the economy improves. And if rates are climbing for the “right reasons,” then companies should do just fine—particularly the tech corporations that have suddenly become so buyback-happy.

If companies can move from buying back to generating growth, then, the market ought to do just fine. Of course, that may be much easier said than done.

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