Foreigners and Corporate Bonds: What's the Attraction?

The recent Treasury TIC data indicate that the investment du jour for foreign buyers are corporate bonds. This means foreigners are still willing to fund our shopping sprees, but you’d better make sure your credit cards are securitized long term. Foreign investors’ appetite for long-term securities came back with a vengeance in December. During this fall’s market turmoil, foreign investors dumped long-term securities (which included equities) and bought up short-term instruments like T-bills. Now that pattern has reversed, foreigners are piling into Treasury bonds and dipping their toes in the equity pool.

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The last time there was such a large shift from short- to long-term securities was in July/August of 2007 - another period of economic turmoil. Interestingly, during this period ten-year bond yields fell from 5.15% in July to 4.53% in August. Over the last two months, there has been a dramatic shift from foreign government sales of T-Bonds to net purchases of the long end of the curve.

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However, the most dramatic change in the purchasing habits of foreign investors can be found in the corporate bond sector. After spending five months selling corporate bonds, both private investors and foreign governments have begun to purchase the debt of U.S. companies.

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The impact of this buying can be seen by looking at the yields on both AAA and Baa bonds. Unfortunately, the data does not indicate which corporate bonds foreigners bought, but in both rating categories, yields are down from the October highs.

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This trade seems to be popular among many investors. Instead of buying equities, investors have been buying corporate debt to receive the interest payment while they wait for better equity market conditions. However, there are two caveats: with so many investors in the trade, getting out could prove problematic and corporate delinquencies could rise as the recession lingers.

Disclosures: None

Comments

[kelm]

I expect we will see a lot of corporate delinquencies this year. We are still in the phase of this crisis where investors are willing to park their money overseas, often on poor information, in the hopes that the grass is greener. I believe there is another phase where they will abandon that and determine that they want their money at home in hard assets that they can see. When that phase comes we will see a mass exit from the US Treasury and Corporate bind markets (stocks will likely not notice by then having been so sold off anyway) with an attendant impact on the dollar.

2009 Feb 26 09:36 AM

[Chris B]

This pattern could mean one of two things. Either foreign investors are moving out of treasuries and pursuing positive real returns because they feel the macroeconomic risk has subsided OR they think they can hide from the popping of the treasury bubble by buying corporates.

Then again, AAA bond yields in after-inflation terms are very decent right now. 5.5% minus 0% inflation equals 5.5%. In an environment of 3% inflation, you'd have to be buying AAA bonds at roughly 8.5%.

At least everything with a "sell" button isn't going down any more.

2009 Feb 26 11:52 AM

[Sicall]

I am a foreign investor and i am buying US corporate Bonds ( ETFs) and have been since the start of the year.

The main reason is i wish to buy a US asset due to dollar strength Vs Pound in times of adversity and secondly what assets can i pick with limited downside risk? The answer ,,,high grade corp Bonds.

I am sure there are many investors like me in Europe at the momment.

2009 Mar 01 07:15 PM