European and Asian investors, some of the largest buyers of investment-grade corporate bonds in U.S in recent years, they could soon increase their debt purchases now that yields have risen, according to strategists at JPMorgan Chase & Co.
The average US investment-grade corporate bond posted a 2.93% yield as of Friday’s close, the highest since April 2020. And, crucially for foreign investors, yields hover around five-year highs. years, even after subtracting hedging costs, JPMorgan strategists wrote Monday morning. Those hedging costs aren’t rising as fast as corporate bond yields now because central banks globally are beginning to tighten monetary policy, the strategists said.
“This is a potentially attractive setup for Asian overnight investors to re-emerge as long-dated, high-grade US corporate bond buyers,” JPMorgan’s Eric Beinstein wrote, adding that the US market is also attractive to European investors. “This latest surge in dollar yields has not been met with rising hedging costs, a key difference between now and the 2018 sell-off.”
That said, there are reasons why foreign demand for US corporate debt is relatively subdued now. Even if hedging costs are low, available yields in Europe and Asia are rising, which could make some investors more inclined to buy domestic debt, Bank of America Corp. strategist Yuri Seliger wrote in a report on Friday. . There is now about $4.9 trillion in negative-yielding debt globally, compared with about $14 trillion for much of December, according to data from the Bloomberg Index.
In addition, the complexity of higher rates globally and quantitative tightening in the US could make hedging futures markets more expensive in the future, according to Credit Suisse Group AG strategist Zoltan Pozsar. European and Asian investors may be reluctant to buy US securities that require hedges that expose them to that risk.
Still, the week after Asia’s lunar new year for the past five years has been a period of heavy overnight investment in US corporate bonds, translating into precedent points in the direction of foreign buying now. , according to JPMorgan. And there, US corporate yields remain significantly higher than those of their euro counterparts, the strategists said.
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