Foreign investors are said to be loading up on corporate America's debt.
“After the Federal Reserve began raising rates for the first time in a decade, foreigners rushed to "buy American" in the U.S. corporate debt market in 2016 at the fastest pace in years,” CNBC explained.
Foreign entities now hold almost 29 percent of U.S. corporate bonds, up from 12 percent in 1990, according to Morgan Stanley.
“Corporate America also issued a record mountain of debt last year, in an effort to lock in low interest rates — and debt payments — before more Fed interest rate increases. Foreigners were ready buyers,” CNBC reported.
The question now is what happens as interest rates rise globally, and the trend stands to reverse. Less debt now trades with a negative yield.
Morgan Stanley bond strategists, in a recent note, point out that as rates rise, the need to buy U.S. debt may not be "as extreme." There have been some signs of a slowdown already this year they note with the biggest outflow of Japanese investors from U.S. credit since October 2015. Japanese buyers are finding other instruments increasingly attractive, when considering currency hedges.
"The big risk is that when the cycle turns, global 'higher-quality' buyers may realize they have more 'credit risk' in portfolios than they appreciated, and these flows temporarily turn the other way," the strategists note. They say low volatility may be masking liquidity risks.
"Flows from Taiwan have remained positive, but anecdotally, an increase in Formosa and local issuance in Taiwan has diverted flows away from U.S. credit into the domestic market. In addition, European investors also started the year as net sellers of U.S. credit," the Morgan Stanley authors wrote.
However, America's gain just may be China's loss.
Investors reportedly may have underestimated the depth of their gamble as China’s riskiest corporate bonds are looking disproportionately expensive, as a tighter monetary policy and painful industrial restructuring weaken companies’ ability to repay debt.
“The unexpected popularity of bonds with low credit ratings in recent months, despite expectations of rising debt defaults and Beijing’s pledge to reduce leverage in financial markets, is the latest example of the constant anomalies in the world’s third-largest but still underdeveloped $9 trillion bond market,” The Wall Street Journal explained.
(Newsmax wires services contributed to this report).
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