The recent Treasury TIC data indicate that the investment du jour for foreign buyers are corporate bonds. This means foreigners are still willing to fund our shopping sprees, but you better make sure your credit cards are securitized long term. Foreign investors appetite for long term securities came back with a vengeance in December. During the market turmoil this fall foreign investors dumped long term securities (which included equities) and bought up short term instruments like T-bills. Now that pattern has reversed, foreigners are piling into Treasury bonds and dipping their toe in the equity pool.
The last time there was such a large shift from short to long term securities was in July/August of 2007 - another period of economic turmoil. Interestingly, during this period ten year bond yields fell from 5.15% in July to 4.53% in August. The trend over the last two months has been a dramatic shift from foreign government sales of T-Bonds to net purchases of the long end of the curve.
However the most dramatic change in the purchasing habits of foreign investors can be found in the corporate bond sector. After spending five months selling corporate bonds both private investors and foreign governments have begun to purchase the debt of US companies.
The impact of this buying can be seen by looking at the yields on both AAA and Baa bonds. Unfortunately, the data does not indicate which corporate bonds foreigners bought, but in both rating categories yields are down from the October highs.
This trade seems to be popular among many investors. Instead of buying equities, investors have been buying corporate debt to receive the interest payment while they wait for better equity market conditions. However, there are two caveats: with so many investors in the trade getting out could prove problematic and corporate delinquencies could rise as the recession lingers.
Disclosures: none