Yield-Hungry Foreign Buyers Seen Boosting U.S. Corporate Bonds

(Bloomberg) -- Foreign buyers just stepped into the U.S. investment grade corporate bond market when Treasury yields moved higher, according to strategists at JPMorgan Chase & Co., and they could help spreads tighten into year-end.

Foreign purchases, measured by overnight dealer net buying or selling activity, were “quite light by historical standards” earlier this week while yields were relatively low, JPMorgan strategists led by Eric Beinstein wrote. But overseas buying amped up midweek after the 10-year Treasury yield had risen around 18 basis points since the end of last week.

JPMorgan sees several potential catalysts for rates rising through New Year’s Eve, including next week’s Federal Reserve meeting. If foreign buying picks up in response, tighter spreads could be on the way, especially because liquidity tends to be lower in the last two weeks of December when traders take time off for the holidays. 

“This combination of potentially more demand and less liquidity could help spreads catch up to the equity market,” Beinstein wrote. 

Investors chasing higher yields than what’s available in their own country can be a significant source of demand for U.S. corporate credit.

The S&P 500 Index traded close to a record high Friday, recovering from a sharp selloff at the start of December sparked by concern over the omicron variant. The spread on the Bloomberg U.S. Investment Grade Index, meanwhile, is at 96 basis points, well off its 2021 low. 

Treasury yields edged lower Friday after U.S. inflation data was in line with expectations. 

Elsewhere in credit markets: 

Americas

A measure of credit risk, CDX IG, fell Friday after key U.S. inflation data met expectations, allowing the Federal Reserve more leeway in rolling back emergency monetary measures.

• No U.S. companies are selling high-grade debt Friday
• Skillz Inc. is floating a 11% yield for its $300 million first-ever high-yield note to help fund possible investments or acquisitions of other companies. It’s expected to price Dec. 15
• In leveraged loans, companies have begun to ease up on announcing new deals as the end of the year approaches, but there are at least three dozen deals on the calendar that are expected to price over the next few weeks
• U.S. District Judge Colleen McMahon expects to render a ruling on Purdue Pharma LP’s opioid settlement next week

EMEA

The European Central Bank will decide on Thursday to stop net purchases under their 1.85 trillion-euro ($2.1 trillion) pandemic plan in March, according to economists polled by Bloomberg, with a temporary boost to the pace of its regular program expected to soften the impact of higher inflation.

• BayernLB offered a sterling covered bond on Friday, as the market stays open two weeks longer than in 2020
• Dunelm Group signed a 185 million-pound sustainability-linked bank facility, with targets including cuts in greenhouse gas emissions and plastic packaging

Asia

The debt restructuring of flag carrier PT Garuda Indonesia is forcing creditors to weigh short-term losses against the potential for gains further down the line in one of the fastest growing aviation markets in Asia.

• China’s top institutions are stepping up efforts to manage the international message on China Evergrande Group’s collapse -- even if the developer itself is staying silent about its default status
• Malaysia’s energy firm Serba Dinamik Holdings Bhd. has defaulted on its $222 million Islamic bond, after failing to make coupon payments, says S&P Global Ratings

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