Jun 8, 2021 - Economy

"Insatiable demand": Foreign investors snatch up U.S. investment grade bonds

U.S. investment grade bonds, spread over Treasuries
Data: Bloomberg Barclays U.S. Corporate Index; Chart: Will Chase/Axios

Interest rates may be low in the U.S., but they're also low — and in some cases lower — around the world. As a result, foreign investors are continuing to snatch up U.S. investment grade (IG) bond funds in order to get paid more for their trouble.

Why it matters: Foreign investor demand has helped bring the key IG index's spread over Treasuries to a record-tight level. In turn, some IG fund managers are stretching into lower-rated assets to help boost returns.

State of play: "We're seeing an insatiable demand for investment grade credit from Japan," Matt Brill, head of investment grade for North America at Invesco, tells Axios.

  • Demand is particularly strong from Japan because the country has adopted a negative short-term interest rate policy, with long-term rates targeted at around zero.
  • Net inflows to all IG U.S. bond funds this year total $236 billion, far outstripping the $25 billion into high-yield funds, according to financial data provider EPFR.

By the numbers: Since the start of the year, the IG spread over Treasuries has tightened by 13 basis points, to around 0.85%, as measured by the Bloomberg Barclays U.S. Corporate Index.

The impact: With spreads so tight, IG managers are dipping into the high-yield bond market more than usual, says Marc Kremer, fixed income portfolio manager at Franklin Templeton.

  • "People are looking for yield, especially to the degree they feel like we're in a good fundamental environment, and growth will support the credit metrics," Kremer says.

Of note: Distressed hedge funds, lacking opportunities, have also stretched into high yield. Amid the extra demand, the ICE BofA high yield index is at a near-record low of its own, at 4.2%.

What to watch: Whether the Fed's unwinding of its $13.7 billion emergency bond purchasing facility has any impact on spreads.

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