Credit investors worldwide are piling into US corporate debt

Bloomberg

Asian and European investors are pouring money into dollar corporate bonds, which have grown more enticing as longer-term US yields have risen and hedging costs have fallen.
A European investor can earn about 1.03% on an average US high-grade corporate bond after hedging, or around 0.8 percentage point above euro-denominated counterparts, according to data compiled by Bloomberg. That’s one of the biggest advantages for US notes since early 2017. A month ago, that gain would have been just 0.56 percentage point.
Increased overseas demand is adding fuel to markets where issuance is already relatively high. Foreign investors that want yield and hedge their holdings back to their home currencies have few other choices, according to Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp.
Bank of America (BofA) expects the demand to help bonds maturing in 30 years or more to “catch up and outperform” those maturing in 10 years, according to a report. Foreign buyers, particularly life insurance companies with long-term liabilities like policies and investment products to fund, typically prefer assets maturing in decades.
Net dealer to affiliate volume is picking up again after a slump in late December. Those numbers have been negative, reflecting foreign investor buying, or US dealers selling notes in their inventories to foreign affiliates that in turn sell them to money managers.
The shift of US government control to the Democratic Party is expected to result in more stimulus, which will require more Treasury issuance to fund it. That’s already pushing yields higher: The rate on 30-year US bonds jumped to nearly 1.9% earlier this month, the highest since February.
Global central banks have signalled they intend to spend 2021 maintaining their ultra-easy monetary policies, and the Federal Reserve is expected to keep its policy rate in a range of zero to 0.25%, where it’s been since March. A lower fed funds rate tends to make it cheaper for international buyers to protect against the risk of currency fluctuations.
That combination of lower hedging costs and higher yields is irresistible to some investors, said Mark Nash, head of fixed income alternatives at Jupiter Asset Management in London.
“Hedged buyers could gravitate to the US out of Europe,” Nash said.
Japanese investors are also cashing in. Buyers of US high-grade corporate bonds can earn around 1.4% after hedging the average bond back to yen, compared with 1.26% a month ago.
There are already signs of the strong demand from foreigners. 7-Eleven Inc. sold $10.95 billion of bonds to help fund its acquisition of Marathon Petroleum Corp.’s gas-station business, and started offering the bonds during Asia hours. There were $17 billion of orders placed by the New York open.
That demand may be showing up in longer-term bond sales. Morgan Stanley sold 31-year debt last week as part of a $7.5 billion offering, the first bank to sell non-hybrid bonds at that maturity this year. When Goldman Sachs Group Inc. sold debt last month, it matured in six years. This time around, it sold 11-year bonds as part of a $5.5 billion offering.
Broadcom Inc., a chipmaker that supplies Apple Inc. and other large electronics makers, raised $10 billion in the US high-grade market toward the beginning of January, drawing more than three times as many orders at the peak. The 30-year portion of the five-part refinancing deal has tightened by about 30 basis points in the secondary market.
“We expect foreign buyers to be in the market most of the beginning of this year,” said Terence Wheat, portfolio manager of US investment-grade corporates at PGIM Fixed Income. “Our view is spreads will continue to tighten and there will be continued investor demand.”