It was the worst first half for US corporate bonds. AmericaIt turned out to be too cheap for everyone but an important group of investors: European and Asian asset managers.
Currency hedging has become more expensive for euro and yen-based investments. Central Reserve.
For Europeans, these costs are much higher after October 2019.
U.S. investment-grade corporate yields have more than doubled this year to 4.75%, but with currency hedging, they are closer to 2.2% for euro and yen investors.
These high costs are unlikely to reverse anytime soon, strategists suggest JP Morgan.
As currency hedging costs rise, potential returns rise in other parts of the world, especially EuropeInvestment-grade corporate bonds yield about 3.3%, according to Bloomberg data.
There was more than $16 trillion of negative-yielding debt globally in August, a sharp reversal as many European and Asian investors turned to U.S. corporate bonds.
U.S. investment-grade bonds have lost about 15% this year. If investors expect Japanese and European pension funds and insurance companies to take advantage of low prices to buy, they may be disappointed, said JP Morgan strategists led by Eric Beinstein and Nathaniel Rosenbaum.
But there are bright spots for U.S. corporate debt, strategists said, including higher demand and lower issuance from domestic investors and pension funds.
Not all foreign investors secure purchases. U.S. yields are still better than those in Asia, so there will be at least some foreign demand, said Lotfi Karoi, chief credit strategist. Goldman Sachs.
“I don’t think foreign demand is going to come off a cliff, but compared to 2020 and 2021, it will definitely be flat,” he said.
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