CreditSights: Foreign Buyers Take A Bigger Bite
The release of the latest Flow of Funds Table from the Federal Reserve recently provides an update on demand trends in the U.S. corporate debt and equity markets by analyzing market ownership by investor group. In the debt market, the most consistent trend is the increase in foreign ownership, which rose to 24.3% in the first quarter, up from 23.7% at the end of 2003.
This is the highest market share recorded for offshore investors and is up substantially from five years ago when foreign ownership accounted for approximately 15%. As offshore demand continues to grow, this demographic is fast becoming the stalwart investor group of the corporate debt arena as it closes in on the market share held by the traditional corporate bond investors, which are insurance companies. Their market share was 27.8% in the latest quarter, down from 27.9% previously. The share of the market owned by insurance companies is not falling substantially but it has remained static, oscillating around the 27% level since 2001, which stands in market contrast to the market share gains made by foreign investors during this time.
This trend is not evident in the equity market where there is much greater stability in the market share. There, foreign investors account for just 10.5% of ownership and this has increased only minimally in the past several years. Insurance companies play an even lesser role in this sector, capturing only a 7.3% market share in the latest quarter.
There are three dominant investor groups in this market. Pension and retirement accounts held 20.1% of the U.S. equity market as at the end of March 2004; mutual funds held 21.9% and households held 38.3%. Each of these levels was little changed from the previous quarter and over the past several years the most notable trend has been a drop in the share attributed to households and an increase in that attributed to pension funds and insurance companies.
While the latest Flow of Funds numbers do not reveal any startling shifts in allocation of ownership versus the previous period, they do highlight the dynamics of the market are changing over time, particularly with regard to the corporate debt market. Here the focus remains on the growing importance of offshore buyers and their rapid ascension to the status of key investor base for U.S. corporate debt. The implication is that the drivers of demand are changing, along with the pattern of buying. Looking forward, U.S. issuers will be more exposed to factors that affect foreign demand, such as currency moves, that previously had little impact on issuing intentions.
Further, much has been made of the entry of leveraged accounts into the credit markets, a trend facilitated by the rapid development of the credit default-swap market and the volatility that this has injected. This is another trend being reflected in the growth of foreign ownership, given many hedge funds are Caribbean-based. It is also a trend that augurs for a more actively traded market going forward given the contrast in investment approach compared to a "buy-and-hold" insurance company.
