Overseas buyers drive tight US credit backdrop

2 min read
Americas, EMEA
Sunny Oh

Foreign investors are on track to set a new record for purchases of US corporate credit, fostering a market environment in which technical factors have overpowered fundamentals.

Foreign purchases of dollar-denominated corporate bonds rose to US$120bn year to date, according to Treasury Department data. That would put it on track to set a new record for purchases, with the annual record set at US$135bn in 2015, said Goldman Sachs analysts.

The buying power of deep-pocketed money managers abroad has kept credit spreads tight even as the corporate bond market contended with concerns around the Covid-19 spread, the prospects of less accommodative policy from the Federal Reserve and inflationary pressures.

“Some Asian investors who put in US$10m or US$15m orders are now putting US$20 to US$25m in orders,” said Damian Engen, global head of investment grade debt capital markets for TD Securities.

The average IG spread was at 89bp over Treasuries on Thursday, only a few basis points away from its record tight of 86bp hit in mid-September, according to ICE BofA. Meanwhile, the average HY spread was at 303bp, 1bp away from all-time lows.

In the primary market, syndicate bankers noted the willingness of foreign investors to snap up credit at narrower spreads helped to tighten pricing even though they do not tend to account for the biggest allocations of a new issue.

“They are smaller but are meaningful, as they tend to be more price takers than price makers,” said Engen.

Adam Coons of Winthrop Capital Management said there were more mandates to buy investment-grade dollar bonds from Japanese and Taiwanese life insurance companies, a mainstay of the corporate bond market.

Much of this foreign buying is being driven by a thirst for yield. US dollar investment-grade corporate debt remains attractive even after accounting for the cost of hedging currency fluctuations for overseas bond buyers. European investors could still pick up 58bp of additional spread by eschewing domestic credit for US corporate bonds, according to Goldman Sachs.

“If you’re going to invest in global corporates, you’re going to be involved in the US IG market one way or the other,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.