Gadfly

Foreign Credit Traders Just Can't Quit America

U.S. company bonds look overvalued, but there's nowhere else to turn.
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Photographer: Mladen Antonov/AFP/Getty Images

Foreign investors should be sick of U.S. corporate bonds.

They've already bought a record amount of them. And they're earning less yield to own them than they once did.

Yet despite some recent rumblings about interest possible waning, the reality is quite the opposite. In fact, depending on the indicator, overseas demand for dollar-denominated credit appears to be accelerating.

Last week, for example, the Treasury Department released data showing that foreign investors bought the greatest amount of U.S. corporate debt in May for any month going back to December 2008.

This data is noisy and lumps in asset-backed securities with company bonds. Still, it jibes with a dynamic observed by Wall Street analysts, including Hans Mikkelsen, head of U.S. high-grade credit strategy at Bank of America Corp. His firm's foreign demand tracker shows continuing purchases from overseas, and institutions in Asia in particular have talked about their desire to capture the higher yields found in the U.S.

That said, U.S. company bonds don't look great. Nearly two-thirds of fund managers surveyed by Bank of America said that yields look too low and prices too high relative to the risk. And if the Federal Reserve starts unwinding its balance sheet later this year, there's a chance that longer-term yields could rise, resulting in mark-to-market losses on existing notes.

But there aren't many options in a world awash with central-bank cash. Consider Japan, for example. Investors there are still grappling with a negative yield experiment that has flipped the concept of borrowing on its head, with investors accepting losses for the privilege of lending to the government. These buyers in particular have steadily increased their U.S. credit purchases, often opting against hedging out currency risk.

In Europe, central bankers are still buying billions of euros of government and corporate bonds every month and have also been holding deposit rates below zero. Even though the region has experienced more sustained growth, policy makers plan to take their time in moving away from their unconventional stimulus efforts. 

This dynamic will keep pushing foreign investors toward the U.S., regardless of concerns about securities being overvalued. If the nation's corporate bond yields look too low, these buyers will keep reaching into longer-dated bonds and those with lower credit grades. 

While foreign investors have reasons to spurn U.S. credit markets, it doesn't as if they're going away anytime soon.

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

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