BofA Says Foreigners Fleeing Negative Rates to Buoy U.S. Debt

Foreign buyers may ramp up purchases of U.S. investment-grade corporate debt as negative interest rates in Japan and Europe...

Foreign buyers may ramp up purchases of U.S. investment-grade corporate debt as negative interest rates in Japan and Europe intensify the search for yield, according to Bank of America Corp.

Overseas investors may pour $400 billion to $500 billion into higher-rated dollar-denominated U.S. company bonds in 2016, according to Hans Mikkelsen, head of U.S. investment-grade credit research at Bank of America Merrill Lynch. That compares with an influx of $332 billion into all U.S. corporate debt last year, he said.

“Right now, you are clearly in an environment where there is too much money chasing too few bonds and that is why you are seeing spreads coming in so rapidly,” said Mikkelsen. A surge in overseas buying is “the big story, and that is the biggest reason for being bullish on U.S. investment-grade” corporate bonds, he said.

The European Central Bank cut interest rates and outlined additional quantitative easing on March 10, while yields on Japanese government debt to 10 years trade at minus levels, putting pressure on global investors to buy dollar debt. The average yield premium on higher-rated U.S. company bonds has fallen to 181 basis points from a more than three-year high of 221 basis points in February, according to a Bank of America index. It will probably drop to 173 basis points by the end of the month, Mikkelsen forecasts.

“The Bank of Japan taking interest rates to negative is very important in terms of Japanese demand for U.S. corporate bonds,” Mikkelsen said. “What the ECB did last week was very very helpful as well; they stepped up their monthly purchases which means that they will just chase even more investors out of the European market into the U.S.”

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While foreign demand is set to support high-grade U.S. corporate bonds, overall issuance of the securities is likely to total about $1.2 trillion this year, down from $1.3 trillion in 2015, according to Mikkelsen. One reason offerings may drop is that a decline in borrowing costs in the euro-area will probably prompt more issuance from U.S. companies there, he said.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum

By: Finbarr Flynn

©2016 Bloomberg News

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