CreditSights: Foreign Buyers Pick Up The Pace
Just two months ago we were worried that the abysmal level of foreign demand for U.S. corporate debt that was seen in the data for January would become a trend that could undermine this important source of funding for U.S. corporations. The latest Treasury Department data certainly puts that fear to rest. Foreign purchases of corporate debt in March 2004 came in at $30.3 billion, versus $21.3 billion in February and $13.0 billion in January. This is the strongest reading of monthly purchases since May 2001.
The increase in demand was seen across virtually all regions, with Japan the only exception. The U.K., which had been notable for its low level of purchases in both of the preceding two months, saw a strong rebound and accounted for $9.0 billion of purchases, up from $3.0 billion in February. This level was outpaced however, by continental Europe, where demand totaled $9.4 billion versus $6.0 billion previously. The combined European and U.K. region is the key area of demand for U.S. corporate debt. It accounted for 62% of March purchases and 50% of all demand in the first quarter.
Purchases from Asia are comparatively minimal. As a whole, the Asian region bought $4.4 billion in March. This is lower than the $5.6 billion seen the previous month but the drop can be wholly attributed to a fall in Japanese purchases. Japan's total was $2.1 billion, down from $3.8 billion. China remains a marginal bidder for corporate debt, though the $987 million worth of bonds it purchased last month was the strongest level of demand seen from that country since June 2003. The Cayman Islands, which we monitor as a proxy for hedge fund activity, purchased $3.8 billion worth of corporate debt in March, on par with the previous month.
The numbers certainly indicate a continued willingness by foreigners to fund the many levels of U.S. indebtedness, a topic that has been much in the news of late, but we are inclined to think that past performance is no guarantee of future success. The expectations for the U.S. economy and U.S. interest rates have changed markedly since March and the appeal of higher interest rates must be offset against the lack of appeal of the capital losses in general (not to mention the losses that would have already accrued to these purchases).
With regard to demand for corporates, we believe that the $30 billion level will prove to be an aberration as have previous months when purchases reached or exceeded this level. Purchases remain highly sensitive to issuance and the exceptionally low volumes seen in April, when the investment grade pipeline delivered less than $20 billion and the continued moribund state of the primary market in May makes it highly unlikely that foreign demand in these months will come anywhere close to March's elevated totals. Our model-based prediction is for purchases of corporate debt to come in at the $17 billion level over the next three months.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
