JPMorgan Says Foreign Investors Are Favoring U.S. High-Grade Debt
“With the increase in yields, U.S. corporate bonds [are] more attractive versus European corporate bonds for all tenor points and all currencies, for the first time this cycle.”
U.S. investment-grade bonds are looking attractive to foreign buyers as yields rise and hedging costs drop, according to JPMorgan Chase & Co.
Daily average net buying from a subset of overseas investors, mostly from Asia, was US$390 million per day last week, the bank’s credit strategists, including Eric Beinstein and Nathaniel Rosenbaum, wrote in a note on Tuesday. That’s 64 percent higher than the year-to-date average pace.
“With the increase in yields for the second week in a row, U.S. corporate bonds have turned more attractive versus European corporate bonds for all tenor points and all currencies, for the first time this cycle,” wrote the analysts.
Buyers of U.S. high-grade corporate bonds earn an average of around 5.7 percent before hedging, the highest since November 27. That compares with returns of 3.8 percent for comparable European notes and an average of 1 percent for Japanese corporate debt, according to data compiled by Bloomberg.
Falling hedging costs are also helping boost the appetite for U.S. corporate bonds. Three-month dollar-hedging costs—based on forward contracts for yen-based investors—have been dropping this year after touching the highest level in more than two decades last October.
Companies are capitalizing on the demand for yield in the United States by tapping the high-grade market at the fastest pace ever. JPMorgan’s $9 billion multi-tranche offering on Monday garnered $33 billion in investor demand, surpassing the $26 billion the lender amassed for its $13 billion deal back in 2021, its largest self-led trade on record, according to data compiled by Bloomberg.
Still, there is concern that demand won’t be sustainable given heightened geopolitical risks and the record issuance, said JPMorgan. Risk premiums on investment-grade bonds—the added premium over U.S. Treasuries that investors get paid to hold such debt—rose 2 basis points (bps), to 91 bps, the widest since March 26.
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