Why are companies storing more cash in corporate bonds?

Clearwater Analytics keeps track of how U.S. corporations invest cash in cash-equivalent investments. One can see that from September 2010 through February 2015, companies appear to have increasingly favored parking cash in corporate debt. (click on the image to make larger)

However, one has to first check whether corporations are behaving unusually. The composition of the U.S. bond market may simply be changing over time. Companies may be passively investing in the bond market - so if more companies are issuing bonds, which they are, they may end up holding more corporate bonds. Below is a stacked chart of the U.S. bond market composition as of Q4 2013 from the Securities Industry and Financial Markets Association. 

From 2010 to 2013, corporate debt increased from 18.5% to 19.8% of U.S. bond market. While this increase corresponds with growing corporate investments in corporate bonds, it is not clear that the magnitudes compare. Looking at the Clearwater Analytics chart, corporations allocated 29% to corporate bonds in December 2010 and 35% in December 2013. Corporations do seem to be choosing to overweight corporate bonds.

Why might corporate bonds be more attractive in 2013 than in 2010? Two possible explanations for this pattern:

First, companies are allocating more to corporate debt because corporate debt yields more than the near-zero interest rate on government and agency debt. However, this explanation does not explain the trend of increasing relative allocations to corporate debt over the past 5 years. Companies could have adjusted their allocations much faster.

A second part of the explanation is that whereas safety was a primary concern after the financial crisis ("Flight to Safety"), now companies are looking to earn higher yields. Issuers of corporate bonds are risky but less risky if the economy is not headed for another crisis since diversification reduces exposure to issuer credit risk.

A third possible explanation is that the Federal Reserve is increasingly likely to increase interest rates. This matters more for corporations today because they tend to be investing in longer term instruments to take advantage of higher yields. Short term interest rates are effectively zero. While the prices of short-term debt are not sensitive to interest rate changes, prices of long-term government debt have the greatest sensitivity to interest rate fluctuations because of the longer horizon. Government agency mortgage-backed securities are also very sensitive to interest rate fluctuations. Consequently, companies seem to be investing relatively less in these government and agency debts. Corporate bonds, in contrast, depend on issuer credit worthiness as well as interest rate fluctuations. Thus, companies investing in corporate bonds achieve higher yields with less sensitivity to interest rates.

We do not see the mix of investment grade and high-yield corporate bonds. I would suspect that high-yield corporate bonds are making up increasingly larger portions of the corporate bond allocation. High yield corporate bonds depend much more on issuer credit worthiness than investment grade corporate bonds and are thus much less sensitive to interest rate fluctuations.

When interest rates rise, government and agency debt becomes relatively more attractive since interest rates are relatively higher and risk is - well still very low for the U.S. gov. I would suspect that after the increase, companies will reduce allocations to corporate debt and increase investments in government debt.