Bond Binge Shows America Is Still Exceptional: Credit Weekly

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(Bloomberg) — President Donald Trump’s proposed tariffs in April stirred fears that the era of US exceptionalism was over, and European and Asian money managers would cut back on buying US corporate debt. So far, it’s not happening, and foreign investors are buying more American debt than they have in months.

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Overseas investors bought about $45 billion of US corporate notes in April, the most in six months, according to the latest Treasury Department data analyzed this week by Citigroup Inc. strategists including Daniel Sorid and Mathew Jacob.

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The robust demand underscores how powerful the status quo is. There are few other debt markets that are as deep as the US’s. There’s about $7.5 trillion of high-grade US corporate bonds outstanding, according to Bloomberg index data, more than double the size of its euro-denominated counterpart.   

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“The US corporate bond market plays too important of a role in global investment portfolios for the turmoil of April to make a significant dent in demand,” said Citigroup’s Sorid in an interview.

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Even if investors do look to shift money out of the US, it will take time for them to find and buy the securities they need. There is extraordinary diversification by sector, quality and duration available in the US, Sorid said. On top of that, liquidity in the credit market has improved since the Federal Reserve stepped in as the lender of last resort at the height of the 2020 pandemic.    

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That made credit an attractive option for investors that were looking to scale back from Treasuries, Sorid said. Foreign demand for US Treasuries declined sharply in April, with foreign holdings of long-term US government bonds decreasing by $111 billion on a valuation adjusted basis and their T-bill holdings falling by $10 billion, according to Citi. Mortgage bonds took a hit too.

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Still, some overseas buyers pulled back in April. Canada was a net seller of $1.4 billion of US corporate notes in April, according to Treasury data analyzed by Citi.

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And Europe is a plausible alternative for many investors, according to Amanda Lynam, head of macro credit research at BlackRock Inc. After many years of negative interest rates, European debt markets are finally seeing better yields and there’s a lot of optimism that government spending for areas including defense can help support growth over the medium to long term, said Lynam on UBS’s Market Moves podcast.

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In addition, the European Central Bank still owns a decent portion of bonds that it bought during the pandemic, she said. That in some way forces investors to move down the quality spectrum because there’s just a lack of bonds available to buy.

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“The marginal dollar has a higher chance of being allocated at home as opposed to in the US now that there’s a return of yield support in that market,” said Lynam, referring to the European market. She added that even if Europe is attractive at the margin, US exceptionalism isn’t generally fading among investors.