CreditSights: The Week In Credit
The latest data on foreign purchases of U.S. securities was released last week. It covers the period for July and continues the trend of almost insatiable offshore appetite for corporate debt. In the latest period, offshore accounts bought $26.43 billion worth of U.S. corporate bonds, up from $23 billion in June.
This brings the year-to-date volume of purchases to $164.4 billion, a 38% increase on the same period last year. 2003 is now set to well exceed the $182 billion worth of annual foreign purchases seen last year, underscoring just what an important factor the offshore presence has become to the market. The latest statistics from the Federal Reserve reveal that 17.4% of U.S. corporate debt is held by foreign interests, up from 14.4% five years ago.
The continuation of strong demand into July is particularly interesting. The massive rise in yields that began during June was well underway then and continued throughout the month causing U.S. fixed-income securities to post substantially negative total return. And the corporate sector was not immune to the rout, with July delivering the smallest amount of excess return all year. The dampening effect that this had on domestic demand was very evident in the mutual fund flows data, which showed the beginning of a shift away from corporates that is still underway.
Foreign appetite appears to have been immune to the shift in fundamentals however, and there was no strong currency trend underway during the period to help explain the resilience of offshore appetite. Demand was not limited to the corporate sector however. Offshore purchases of Treasuries were also strong and at $44.7 billion, July was the third consecutive month that such purchase exceeded $40 billion. Agency debt also recorded an increase over the prior month's purchases ($11.8 billion versus $7.2 billion) but these totals remain well down on the level of monthly demand that was being seen earlier in the year before the increase in agency headline risk. The enthusiasm did not extend to the equity market however, which saw its first net redemptions since February.
Another reason that the increase in corporate purchases is surprising is that July was not a particularly strong month in terms of primary market issuance. As a percentage of investment- grade issuance, the month's purchases equate to a massive 85% of the $31 billion that came to market during July, which spiked this particular ratio to a new high.
However, as we have contended previously, one of the features of the debt market in 2003 has been the strong year-to-date performance of the high-yield sector, which has been augmented by a heavy volume of issuance.
If July's high-yield volumes are included then foreign purchases represent 55% of the primary calendar for the month. Given the extent of the high beta compression trade in the U.S. and the consistent move down the credit spectrum that is a structural feature of the maturing offshore credit markets, it seems likely that the persistently strong volume of foreign purchases are being directed towards high yield as well as high-grade deals.
Looking forward, details of August's purchases will be available on October 16. August was a month of extremely low issuance volumes as the market experienced a brief paralysis from the combined effect of summer and the continued yield sell off. Our CreditSights forecasting model predicts purchases in the area of $14 billion over the next three months. If the data reveals that demand was able to sustain a much stronger pace (it has been running at the top end of our forecasts this year) it will be a wonder indeed.
Analysis by CreditSights, Inc., an independent online credit research platform. Call (212) 340-3888 or visit www.CreditSights.com for more information.
