Yesterday Google decided to sell $3 billion worth of bonds, despite having $37 billion in cash. Greg Mankiw wonders why they would do this when the yield curve is very steep by historical standards. One of his readers suggests that it is because most of Google's cash is held offshore, and would be subject to a punishing tax rate of 35% if repatriated; Google is essentially betting that the corporate tax rate will be lower in the future, at which time they can repatriate the cash and pay back the bonds and come out ahead.
I would like to suggest yet another reason. First, I would note that the bonds Google is selling are of relatively short maturity: $1 billion of 3-yr bonds, $1 billion of 5-yr bonds, and $1 billion of 10-yr bonds. That gives you an average maturity of just over 5 years. To simplify the analysis, Google is effectively selling something like $3 billion of 5-yr bonds. Thanks to its AA- credit rating, Google is able to borrow at a rate that is about 50 bps on average above what the U.S. Treasury would pay for similar maturity bonds. That's not a terribly low spread, and the yield curve is relatively steep, but it is a relatively low spread over extremely low 5-yr Treasury yields, as the chart below demonstrates.
In short, Google is borrowing $3 billion at a yield that is just about the lowest yield in modern U.S. history. The Federal Reserve has been trying very hard to convince the world to borrow dollars, and Google is simply taking its advice. If corporate tax rates decline in the next year or so—a bet that looks more attractive almost every day—and if the economy improves and interest rates rise, Google will have executed a very profitable trifecta: it could repatriate its cash at a lower tax rate and buy back its bonds at a discount. And even if none of this works out, Google's cost of borrowing $3 billion will only be about 2.3%, which in an historical context is not very much. And if the dollar continues to depreciate, then borrowing dollars today in order to keep cash abroad will also prove to be a profitable strategy.