Foreigners Are Once Again Accumulating US Corporate Bonds by Eric Bush, CFA, Gavekal Capital Blog
An under appreciated consequence of the financial crisis is the fact that foreigners became net sellers of US corporate bonds for an unprecedented 7 years. It is unprecedented because from 1984 to 2008, the one-year moving average of net purchases of US corporate bonds by private foreigners never even dipped into negative territory. As the financial crisis spread and the credit worthiness of banks around the world was put into question, foreigners unloaded (either by choice or by force) US corporate bonds at a previously unthinkable rate. The nadir of the selling, according to the TIC data, actually occurred in January 2010 when nearly $25 billion worth of corporate bonds were sold by foreigners. Since the end of last year, foreigners have been consistently been buying US corporate bonds. The one-year moving average has increased to nearly $12 billion which is the highest level since July 2008.
If we use the Fed’s flow of funds data, it seems that the accumulation of US corporate bonds by foreigners has actually been going on for nearly three years. In fact, as of 6/30/2015, foreigners purchased the second largest amount of US corporate bonds ever, just behind the peak in the first 1Q 2007.
What can past market crashes teach us about the current one?
Regardless of the data source, the trend looks the same. Foreigners are buying bonds at a much more rapid pace than they were at the beginning of the recovery. It will be interesting to see if this helps to compress spreads between corporate bonds and US treasuries. As more foreigners were buying bonds from 2002-2007, the spread between AAA bonds and US treasuries narrowed from 254 basis points to just 62 basis points in June 2007. Conversely spreads drastically widened as foreigners turned from a historically constant net buyer to a net seller. Spreads eventually peaked at 302 basis points in March 2009. The recent period of buying as actually coincided with a widening of bond spreads. However, one would think that if foreigners continue to accumulate US corporate bonds they could provide a strong bid in the market.