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Expand chart
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.

Go deeper

Walmart joins the green bond party with $2 billion deal

Illustration: Sarah Grillo/Axios

Walmart just raised the largest green bond ever in the U.S. corporate bond market.

Why it matters: The $2 billion bond deal illustrates that U.S. investors’ interest in green bonds is not going anywhere. Companies are tapping into that demand, and putting money behind efforts to battle climate change.

CCP releases two jailed Canadians after Huawei CFO deal with DOJ

Photo: Sheldon Cooper/SOPA Images/LightRocket via Getty Images

Two Canadians imprisoned by the Chinese government for over 1,000 days have been released and are expected to arrive in Canada on Saturday, Prime Minister Justin Trudeau said Friday.

Why it matters: Their release comes hours after Huawei Technologies CFO Meng Wanzhou reached a deal with the U.S. Department of Justice that resolves the criminal charges against her and could pave the way for her to return to China.

Updated 8 hours ago - Politics & Policy

Arizona GOP's private recount of 2020 election confirms Biden's win

Contractors working on behalf of the GOP examine and recount 2020 ballots at Arizona Veterans Memorial Coliseum in Phoenix in May. Photo: Courtney Pedroza/Getty Images

In an odd coda to the 2020 election, private contractors conducting a GOP-commissioned recount in Arizona confirmed President Biden’s win in Maricopa County.

Why it matters: The unofficial, party-driven recount has been heavily covered on cable news as part of former President Trump's continued effort to sow doubt about the election result.

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