[A-List] Foreign Buying Is Rising In U.S. Corporate Bonds

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The Wall Street Journal

(Copyright (c) 2004, Dow Jones & Company, Inc.)



Thursday, August 19, 2004



Credit Markets



Foreign Buying Is Rising In U.S. Corporate Bonds



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Huge Trade Deficit Means Overseas Investors Seek Out Dollar-Denominated
Issues



By Christine Richard Dow Jones Newswires


NEW YORK -- Insurance companies have been the dominant buyers of U.S.
corporate bonds for decades. But if the current pace of overseas buying
continues, foreign investors will oust U.S. insurers from the top spot.
The shift reflects the massive support the U.S. trade deficit has
provided to the corporate-bond market, as overseas holders of dollars
recycle those funds back into securities. It also highlights the
market's potential vulnerability should foreign investors turn negative
on the asset class.

Insurance companies held more than half of all corporate bonds in the
1960s, but by 1995 that number had declined to around 30%. At the end of
the first quarter of 2004, U.S. insurers owned 24.4% of U.S. corporate
bonds, compared with 24.3% held by foreign investors, said Kamalesh Rao,
an economist at Moody's Investors Service, citing Federal Reserve data.
"In all likelihood, foreign buyers have overtaken or are just about to
overtake insurance companies," he said.

Treasury data show foreign appetite for corporate bonds increased in the
second quarter of 2004. Foreign accounts bought a net $27 billion of
corporate bonds in June, or the equivalent of 65% of all newly issued
bonds. That is likely to have pushed foreign investors ahead of
insurance companies as the largest holders of U.S. corporate bonds.

Henry C.K. Liu, chairman of Liu Investment Group, a private investment
firm in New York, said the increase in foreign holdings is being driven
by the rising U.S. trade deficit. The trade deficit, which jumped to a
record $55 billion in June, "once again throws the spotlight on the
rising external indebtedness of the American economy," Mr. Liu said.

The increase in dollars going overseas to pay for imported goods is
fueling demand overseas for dollar-denominated securities, Mr. Liu said.
The U.S. is relying almost exclusively on sustained foreign investment
in public debt and corporate bonds to fund its deficit, he added.

Foreign buying of corporate bonds has increased on an absolute basis
this year even as issuance in the primary market has declined and demand
by U.S. investors has been on the wane. "Appetite for fixed interest
globally is on the rise," said Edward Marrinan, head of investment-grade
credit strategy at J.P. Morgan. And for overseas investors,
dollar-denominated U.S. corporates are an attractive option.

One reason for that increased demand is that foreign investors have been
losing interest in U.S. stocks. "U.S. corporate bonds have become the
new U.S. equities for foreign investors," said Lionel Price, chief
economist with Fitch Ratings in London.

In 2000, non-U.S. investors bought $194 billion of U.S. equities, a
number that has steadily declined as investors have racked up big losses
during the market's downturn, Mr. Price said. In the first quarter of
2004, non-U.S. investors bought $7 billion in equity, Mr. Price added.

Foreign demand clearly has been a major support for the corporate-bond
market. But foreign demand also could make corporate bonds more
vulnerable. "When you've got international investors, they're more
likely to go elsewhere if conditions become less attractive," Mr. Price
said.

The increased foreign buying raises some even more fundamental concerns
for Chris Dialynas, a managing director at Pacific Investment Management
Co. in Long Beach, Calif. "It's a positive for the corporate-bond
market, for corporate issuers and holders," he said. "But it's a
short-run positive."

Increased foreign ownership of U.S. corporate bonds is an indication of
the country's massive current-account deficit. As more U.S. dollars flow
overseas to trading partners, the U.S. is taking on more and more debt
funded by overseas investors, a dynamic that ultimately is unhealthy for
the U.S. economy and unsustainable, he said.

Foreign buying has been even more pronounced in the Treasury market,
with foreign investors holding around 40% of outstanding debt. The
buying has been dominated by Asian central banks parking dollars
accumulated as the result of large trade surpluses with the U.S.

If these dollars were sold back into the foreign-exchange market, the
dollar would weaken against Asian currencies and reduce the
competitiveness of Asian exports, a trend that Asian governments have
been determined to combat.

Treasurys

Treasurys fell as stocks rallied, even though oil markets remained
strong. Stocks had been trading inversely to oil, but Wednesday's gains
in stock indexes suggests investors believe the U.S. economy may be
weathering the effects of higher energy prices, analysts said. That
would be bearish for bonds, which typically gain on indications of
weaker economic growth and tamer inflation.

At 4 p.m., the benchmark 10-year note was down 12/32 point, or $3.75 for
each $1,000 invested, at 100 2/32. Its yield rose to 4.242% from 4.198%
Tuesday, as yields move inversely to prices. The 30-year bond's price
was down 18/32 point at 104 26/32 to yield 5.043%, up from 5.007% Tuesday.

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Brian Blackstone contributed to this article.