The Federal Reserve hasn’t bought US corporate debt for months, but foreigners have certainly opened their portfolios.
Foreigners have already made $ 104 billion in net purchases in U.S. corporate debt markets in the first five months of the year, easily putting them on track for a record high in 2021, according to a Goldman Sachs report.
“To put this figure into context, foreign purchases in the first five months of 2021 almost surpassed the previous annual record of $ 135 billion set in 2015,” wrote Lotfi Karoui’s credit strategy team at Goldman. , in a weekly note.
Not a single month from January to May saw net sales of foreigners in US corporate credit, in stark contrast to their sales tsunami last year, which peaked at nearly $ 60 billion in July 2020, according to the Goldman report.
The international buying frenzy comes as yields continue to fall across much of the world, including the yield on the 10-year T-bill TMUBMUSD10Y,
and after the volume of foreign purchases of US corporate debt last year collapsed into negative territory.
On Friday, returns for most of the investment grade U.S. corporate bond market of around $ 10.7 trillion were around 2%, a level that was not there until last summer, when we look at the ICE BofA US Corporate index.
The yield approached the record low of 4% in the non-investment grade, or junk bond, market segment, as tracked by the ICE BofA US High Yield Index.
The rally in corporate debt comes despite the Fed’s withdrawal from the sector. This summer, the central bank began selling off its nearly $ 14 billion in U.S. corporate debt accumulated last year during the pandemic, after its first foray into the booming corner of credit markets. She started by selling her holdings in corporate debt exchange traded funds.
So far, the Fed’s exit has not dampened the appetite of bond investors looking for a bit of yield, with central banks continuing their large-scale asset purchases to help fuel their local economies. .
See: ECB aims to keep interest rates low longer – much longer, economists say
The nearly $ 40 billion iShares iBoxx Investment Grade Corporate Bond LQD ETF,
was down about 0.2% on Friday and 1.9% on the year, but offering a dividend yield of 2.4%, according to FactSet.
For junk bonds, the approximately $ 20 billion iShares iBoxx $ High Yield Corporate Bond ETF HYG,
was up 0.2% Friday and 0.8% on the year, with a dividend yield of 4.4%.
The Goldman team expects the pace of overseas purchases to normalize in the coming months, but also said that the low costs of currency hedging, combined with the long dollar rates that are “the more profitable among their G10 counterparts ”, are expected to continue to stimulate foreign demand for US corporate debt.
Meanwhile, after recovering from Monday’s rout, US SPX stocks were back in record territory on Friday as the DJIA Dow Jones Industrial Average was last spotted above the 35,000 mark. .