Tags: Foreigners | Buyers | Corporate | Bonds

Foreigners Are Biggest Buyers of US Corporate Bonds

Foreigners Are Biggest Buyers of US Corporate Bonds
(Dollar Photo Club)

Dr. Edward Yardeni By Tuesday, 14 March 2017 01:42 PM EDT Current | Bio | Archive

The Fed released its Financial Accounts of the United States with data for Q4-2016 last week. It provides amazingly comprehensive insights into the flow of funds, balance sheets, and integrated macroeconomic accounts of the US financial system. It’s really almost too much information to wrap one’s head around.

To help process it all, Debbie and I have created a bunch of chart publications over the years that visualize quite a bit of it on our website. The saying that a picture is “worth a thousand words” is attributed to newspaper editor Tess Flanders discussing journalism and publicity in 1911. Debbie and I have always believed that a chart is worth a thousand data points in a time series. Given our chosen profession, we tend to focus on the data for the equity and debt markets in the Fed’s quarterly statistical extravaganza.

Let’s start with the latest supply side of these markets, and move on from there to the demand side:

(1) Supply-side totals. Net issuance of equities last year totaled minus $229.7 billion, with nonfinancial corporate (NFC) issues at -$565.7 billion and financial issues at $269.7 billion (Fig. 1). The increase in financials was led by a $283.9 billion increase in equity ETFs, the biggest annual increase on record. The decline in NFC issues reflected the impact of stock buybacks and M&A activity more than offsetting IPOs and secondary issues.

The net issuance of debt securities totaled $1,555.3 billion last year, with the major components all increasing, as follows: Treasuries up $842.8 billion, agency- and GSE-backed securities up $351.6 billion, and corporate and foreign bonds up $375.1 billion (Fig. 2).

The increase in corporate bonds was led by a $271.7 billion increase in bonds issued by nonfinancial corporations (Fig. 3). Domestic financial corporations raised just $12.9 billion as ABS issuers paid down $99.9 billion. US residents purchased $90.4 billion in foreign bonds, which is counted as the net issuance of these securities in the US.

The nonfinancial corporations (NFCs) may have used some of the $271.7 billion in the funds they raised in the bond market to buy back $565.7 billion in their shares (Fig. 4). Then again, NFCs had near-record internal cash flow of $1.8 trillion, with tax-deductible depreciation expense at a record $1.3 trillion (Fig. 5). The internal cash flow exceeded NFC capital spending, which also remained in record-high territory, at $1.7 trillion, despite the recession in the energy sector.

(2) Demand side for equities. To get a closer view of the demand for equities, let’s focus now on the quarterly data at an annual rate rather than at the four-quarter sum (Fig. 6). This shows that equity mutual funds have been net sellers for the past five quarters, reducing their holdings by $151.3 billion over this period. Over the same period, equity ETFs purchased $266.4 billion, with their Q4-2016 purchases a record $485.4 billion, at a seasonally adjusted annual rate. Other institutional investors have been selling equities for the past 24 consecutive quarters, i.e., during most of the bull market! Foreign investors have also been net sellers over this same period.

The bottom line is that the current bull market has been driven largely by corporations buying back their shares, as Joe and I have been observing for many years. More recently, we have been seeing individual investors increasingly moving out of equity mutual funds and into equity ETFs. Both kinds of buyers tend to be much less concerned about historically high valuation multiples than more traditional buyers are.

As they have become increasingly popular, equity ETFs have been net issuers of equities at an increasing pace in recent years, while other financial issuers have been mostly dormant (Fig. 7). At the end of last year, equity mutual funds totaled $9.19 trillion, while equity ETFs totaled $2.03 trillion, according to the Fed’s data (Fig. 8). Both have benefitted from the bull market in stocks, of course. However, Investment Company Institute data show that cumulative net inflows into equity mutual funds have been just $198 billion since the start of the bull market during March 2009 through January 2017 (Fig. 9). Over the same period, $1.1 trillion poured into equity ETFs (Fig. 10). On a year-over-year basis, the pace of net inflows increased by $240.4 billion, the fastest for the series going back to 2001 (Fig 11).

(3) Demand side for Treasuries. Interestingly, the Fed’s data show total Treasury borrowing of $842.8 billion, while the Monthly Treasury Statement of Receipts and Outlays shows that the deficit was $580.0 billion during calendar 2016 (Fig. 12). On a 12-month basis, outlays continue to rise into record-high territory to $3.9 trillion through February, while receipts have flattened out around $3.3 trillion (Fig. 13).

So who were the big buyers of Treasuries last year? In first place were money market mutual funds with net purchases of $313.2 billion. In second place was the household sector, which purchased $205.5 billion. The biggest seller was the “rest of the world,” which sold $115.0 billion according to the Fed’s data. Treasury data show that foreign holders sold $142.3 billion last year in US Treasuries, led by a $279.5 billion decline in the holdings of central banks (Fig. 14).

(4) Demand side for agencies. Apparently, the bulk of the $351.6 billion raised by budget agencies, GSEs, and agency-/GSE-backed mortgage pools was provided by money market mutual funds (specifically, $210.4 billion last year). The second-biggest buyers were US-chartered depository institutions ($147.4 billion). In third place were foreign buyers ($78.6 billion).

(5) Demand side for corporates. Much to our great surprise, the Fed’s data show that the biggest buyers of the $375.1 billion of net corporate bond issues last year were foreigners ($309.8 billion) (Fig. 15). We thought that US investors were the ones reaching for yield. The household sector actually sold $156.4 billion last year. However, individual investors might have fueled the $78.8 billion and $63.4 billion in purchases by mutual funds and ETFs. Life insurance companies ($101.1 billion) led the purchasing of corporate bonds by the other institutional investors.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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Much to our great surprise, the Fed’s data show that the biggest buyers of the $375.1 billion of net corporate bond issues last year were foreigners ($309.8 billion).
Foreigners, Buyers, Corporate, Bonds
Tuesday, 14 March 2017 01:42 PM
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