Negative Rates Make Corporate America's Bonds Only Game in Town

  • Japanese, European bond investors increasingly look abroad
  • Inflow of cash could help cut U.S. corporate borrowing costs

Mario Draghi and Haruhiko Kuroda have handed a big gift to U.S. companies like Coca-Cola Co. and General Electric Co.: piles of money from European and Japanese investors.

Nearly $8 trillion of bonds globally have negative yields now, which has spurred fund managers from around the world to buy corporate debt in the U.S., where interest rates are positive.

“Draghi has forced me as a European investor to look at overseas holdings that aren’t euro-denominated,” said James Tomlins, a London-based high-yield money manager at M&G Investments, which oversees about 250 billion pounds ($352 billion) of assets. “The potential for returns is much better in the U.S.”

Eight of 11 Japanese regional banks that Bloomberg surveyed recently said they’ve already begun or are considering buying riskier securities outside of their home market. A Japanese insurance trade group said last month the industry will have little choice but to buy debt issued in other countries. 

Coming to America

Demand from Asian and European investors has already helped cut risk premiums on U.S. investment-grade corporate bonds by about half a percentage point since mid-February, according to Bank of America Merrill Lynch index data. 

By year-end, the premiums may fall to about 1.5 percentage points from current levels of around 1.72 percentage points, said Hans Mikkelsen, head of U.S. investment-grade credit research at Bank of America Merrill Lynch. Investors in Europe and Asia could buy as much as $500 billion of American companies’ debt in 2016, up 50 percent from last year, Mikkelsen forecast. 

Recent central bank decisions in Europe and Asia have lowered yields on many bonds from just above zero to negative levels.

“We have to turn to foreign bonds, such as U.S. and European notes, or alternative products, to meet business expectations for securing profits,” said Yoshihiro Yamanaka, an executive officer at Bank of Kyoto Ltd., a Japanese regional bank.

Few Alternatives

Corporate securities and some kinds of municipal bonds are more attractive to many investors because they offer higher returns after currency hedging costs, said Masato Mishina, an institutional sales head at Nikko Asset Management Co. in Tokyo, with about $163 billion in assets under management at the end of last year.

The firm sells funds to lenders that invest in dollar-denominated assets, and hedge currency risk.

“In the past, regional banks used to tell us not to bring them investments that didn’t meet clear internal rules and they wouldn’t buy no matter how often we brought them,” said Mishina. “What they say now is different: ‘We won’t say no at the door, bring us your investment ideas.”

Japanese investors often gravitate to companies whose brand they recognize, such as Coca-Cola, Mishina said.

A report from the Federal Reserve said that about 32 percent of the roughly $9.46 trillion of outstanding U.S. corporate bonds were held by foreigners as of the fourth quarter, a proportion that has risen by 8 percentage points since 2009.

Foreign Holdings

Money managers in Japan have experienced low yields for a generation. The trend intensified after Bank of Japan Governor Kuroda announced a negative interest-rate strategy on Jan. 29 in an effort to fend off deflation. Japanese government bonds account for about 66 percent of the nearly $8 trillion of sovereign debt with negative yields.

Europe first embraced negative rates in mid-2014. European Central Bank President Draghi said earlier this month the institution was cutting rates further. Yields on even some corporate securities in the euro zone this week fell below zero.

M&G’s European high-yield bond fund has been ramping up its exposure to American companies in recent months. The fund is now 21 percent invested in U.S. junk notes and Treasuries, near the highest amount allowed under its policy statements. In 2013, that figure was closer to 10 percent.

Japanese government securities currently have negative yields for maturities out to 10 years, and the average yield on domestic corporate debentures is 0.2 percent, according to Bank of America indexes. That compares with the average 3.3 percent on U.S. investment-grade notes.

“For global investors, investment-grade investors, there is only one game in town, and that is U.S. corporate bonds,” Bank of America’s Mikkelsen said.

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