If It's Tuesday, It Must Be Risky Credit

Overseas investors are delving into lower-rated securities with longer maturities.
At Closing, June 19th
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Tourists have played an increasingly important role in the $6.9 trillion U.S. corporate credit market.

Foreign investors have helped fuel the market’s doubling in size since 2008. They have contributed in part to the 8.9 percent annualized returns in the period. And not only are they still flooding the dollar-denominated credit market with cash, they’re delving into riskier securities with longer maturities.

Riskier Business

Foreign investors appear to be funneling more of their money into riskier U.S. corporate bonds

Source: Bank of America Merrill Lynch Global Research

Note: Percentage of total investment grade and high-yield dealer-to-affiliate volumes

As evidence of this, Bank of America credit strategists look at the type of bonds that U.S. dealers are selling to their overseas affiliates, with the idea being that these securities are most likely intended for foreign buyers. This is by no means a complete picture of demand from non-U.S. investors, but it’s a clever way to shed some light on somewhat opaque market dynamics.

Bank of America's data show that these foreigners are increasingly buying U.S. bonds with lower ratings that come due in more than seven years.

Stretching Out

Foreign investors are increasingly buying U.S. corporate bonds with longer maturities

Source: Bank of America Merrill Lynch Global Research

Note: Percentage of net dealer-to-affiliate investment-grade corporate bond transactions

On one hand, this isn't surprising given that European central bankers are buying corporate bonds in the region, in some cases so aggressively that companies are tailoring debt specifically for them to buy. Yields on European investment-grade bonds have fallen to 0.7 percent, more than two percentage points less than yields on similarly rated dollar-denominated notes.

Split Paths

U.S. corporate bond yields look attractive to foreigners relative to plunging European yields

Source: The BofA Merrill Lynch Euro Corporate Index, The BofA Merrill Lynch US Corporate Index

"We expect this foreign reach for yield to continue," the Bank of America analysts led by Hans Mikkelsen wrote. "Not only do we expect the volume of foreign buying to accelerate after the summer, we also expect them to take down more credit risk per dollar."

Foreign buyers will provide a support for dollar-denominated corporate bonds of all types in the months ahead, regardless of the fact that the U.S. is in the later stages of a credit cycle and some money managers are warning of crisis ahead. The tourists are camping out in increasingly dicier territory, and it's hard to see what'll drive them away anytime soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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