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In One Chart: Foreign buying of U.S. corporate debt takes off, even with Fed no longer buying

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The Federal Reserve has not been buying U.S. corporate debt for months, but foreigners certainly have been opening their wallets.

Foreigners already made $104 billion worth of net purchases in the U.S. corporate debt markets in the year’s first five month, putting them easily on a path to set a record in 2021, according to a Goldman Sachs report.

“To put this number into context, foreign buying in the first five months of 2021 alone has almost exceeded the previous full-year record of $135 billion set in 2015,” Lotfi Karoui’s credit strategy team at Goldman wrote, in a weekly note.

Foreign buyers piling into U.S. corporate debt

U.S. Department of Treasury, Haver Analytics, Goldman Sachs research

Not a single month from January through May saw net selling from foreigners in U.S. corporate credit, a sharp contrast to their tsunami of selling last year, which peaked at almost $60 billion in July 2020, according to the Goldman report.

The international buying spree comes as yields continued to tumble across much of the globe, including the yield on the 10-year Treasury note
TMUBMUSD10Y,
1.276%
,
and after the volume of foreign purchases of U.S. corporate last year debt crashed into negative territory.

Yields in the biggest investment grade portion of the roughly $10.7 trillion U.S. corporate bond market on Friday were around 2%, a level that did not exist before last summer, when looking at the ICE BofA US Corporate Index.

The yield was near record lows of 4% in the non-investment grade, or “junk bond” slice of the market, as tracked by the ICE BofA US High Yield index.

The rally in corporate debt comes despite the Fed’s move out of the sector. This summer, the central bank began selling off its near $14 billion of U.S. corporate debt holdings accumulated last year during the pandemic, after its first foray into the booming corner of the credit markets. It started by selling its holdings of corporate debt exchange-traded funds.

So far, the exit of the Fed has done little to dull appetite among bond investors looking for any scraps of yield as central banks keep up their large-scale asset purchases to help stoke their local economies.

See: The ECB aims to keep interest rates lower for longer — a lot longer, say economists

The near $40 billion iShares iBoxx $ Investment Grade Corporate Bond ETF
LQD,
-0.04%

was down about 0.2% on Friday and 1.9% on the year, but offering an 2.4% dividend yield, according to FactSet.

For junk bonds, the roughly $20 billion iShares iBoxx $ High Yield Corporate Bond ETF
HYG,
+0.19%

was up 0.2% Friday and 0.8% on the year, with a 4.4% dividend yield.

The Goldman team expects the pace of foreign purchases to normalize in the coming months, but also said low foreign-exchange hedging costs, combined with long-end dollar rates which are “the highest yielding among their G10 counterparts,” should keep driving foreign demand for U.S. corporate debt.

Meanwhile, after recovering from Monday’s rout, U.S. stocks SPX were back to trading in record territory Friday, with the Dow Jones Industrial Average DJIA last spotted above the 35,000 mark.

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