Despite a recent back up in Treasury yields on speculation the dollar's fall will spook foreign investors, a weaker greenback may actually bode well for corporate spreads in the long term, according to credit strategists. They argue a weaker dollar could boost exports and increase creditworthiness among U.S. corporates, in a fundamental long-term trend that should more than offset any drop in demand from foreign buyers.
Kamalesh Rao, economist at Moody's Investors Service, said further weakness of the dollar to $1.40 to the euro could force foreign investors to rethink their investments; the dollar was at $1.33 on Dec. 1. But the lower dollar could ultimately boost corporate balance sheets. "With another 5-10% drop in the dollar, spreads may tighten another five basis points," he said, noting the weaker exchange rate will help U.S. exports.
The dollar's recent freefall comes at a time when foreign demand for corporate bonds is at its strongest ever. Foreign investors bought more than $44 billion of U.S. corporate bonds in September, the highest net monthly purchase ever recorded, according to data from the Treasury. There is no accurate historical precedent to gauge how the dollar's decline will impact foreign investment in corporate bonds because foreign investors have a larger role in the U.S. market than they have ever had.