Foreign investors proved one of the largest sources of demand for corporate bonds this year and are credited as one of the main factors supporting historically tight spreads. About 25% of the corporate bond market was in the hands of foreign investors at the end of the third quarter versus 17% in 1999, according to data from the Federal Reserve.
The increase in foreign buying has made the dollar's value more of an issue for corporate bond professionals, said Kamalesh Rao, economist at Moody's Investors Service. The dollar's decline has particularly been in the spotlight in recent months, but while some market participants worried the weaker exchange rate would spark a foreign sell-off of corporate bonds and unwind
tight spreads, others argued the boon to exports would ultimately boost U.S. credit (BW, 12/6).
Milton Ezrati, senior economic strategist at Lord, Abbett & Co. in Jersey City, N.J., noted foreign investors have descended the credit ladder in the hunt for yield in the credit markets, which is unusual since international buyers tend to be more conservative. "Because spreads have come in so much, the high-yield market is attracting a more timid buyer than in the past," he said.