Fixed-income strategists disagree over whether the prospect of declining foreign investment as a percentage of total new issuance in the U.S. corporate bond market will significantly impact spreads. Last year's increase in foreign investment was critical to helping the market absorb a record year in corporate bond issuance, says Louise Purtle, head of U.S. credit strategy at Creditsights, an independent fixed-income research firm. Still, Purtle sees that trend reversing for two reasons. First, she says negative carry in the dollar versus the euro will reduce incentives to invest in dollar-denominated issues. Also, she believes the foreign investors were attracted to the U.S. market because it gave them an opportunity to diversify their sector allocation and credit risk. However, much of the recent surge in issuance is in high-quality, financial institutions seeking to reduce their reliance on commercial paper. Purtle says foreign investors have sufficient opportunity to invest in such credits in their home countries.
Steve Zamsky, credit strategist at Morgan Stanley, is not convinced that foreign investment will decline, or that it matters. He believes certain statistical data overemphasizes the impact of foreign investment on corporate spreads, by incorporating mortgage-backed securities, or underestimating the reliance of foreign investors on diversification opportunities in the U.S.