Foreign Funds sour on U.S. corporate bonds as Trump sows chaos

(Bloomberg) -- European and Asian money managers are showing signs of losing some of their appetite for lending to US companies as trade wars heat up, in a potentially worrying sign for corporate America.

Investors outside the US turned into net sellers of corporate debt in the first half of April, after US President Donald Trump announced the highest tariffs on foreign countries in more than a century. That's according to data tracking direct flows compiled by Goldman Sachs Group Inc. strategists including Lotfi Karoui.

The selling comes after overseas investors made record purchases of US corporate debt in 2024. Official data shows the demand slowing in February, according to Citigroup.

There are signs of foreign investors selling US assets broadly. Data showing flows into funds that take money from overseas and buy US stocks and bonds shows a sharp drop in purchases over the past two months, according to a note from George Saravelos, Deutsche Bank's head of foreign exchange strategy, on Monday.

At least some foreign investors are guarded about jumping back into US credit after April's roller-coaster ride.

"We have to be a little more cautious" about US credit, said Kenichi Kuga, a senior general manager at Japan Post Insurance Co.'s global credit investment department, which had about 4.2 trillion yen ($29 billion) of foreign debt holdings at the end of 2024. "The US credit market seems to have been slow to price in risks, compared with declines and volatility in equities."

It's not yet clear that there's a massive structural shift in foreign demand, but some investors believe that the US itself is probably going to take the biggest economic hit from Trump's policy steps, Goldman Sachs's Karoui said.

In early April, Trump's proposed tariffs hit security prices worldwide, including US corporate debt, Treasuries and stocks. Prices broadly recovered after the US president paused the proposed increases and talked about negotiating agreements with individual nations.

Around 30% of US corporate bonds are owned by foreign investors, according to economist Torsten Slok at Apollo Global Management Inc. If those buyers continue pulling back, and US money managers don't step in to make up the difference, risk premiums on the debt will have to widen, said Hans Mikkelsen, a credit strategist at TD Securities.

"Some of the rhetoric out of Washington toward foreigners, and the fact that the US imposed massive tariffs on basically all countries — that alone can lead to a decision to maybe not put all your eggs in one basket," Mikkelsen said.

Investor Caution

For asset allocators outside the US, the relative-value math involves comparing yields on domestic corporate notes with debt abroad, and then adding the cost of hedging their US investments back into their home currency.

In Japan, that calculus works out in favor of domestic corporate credit, according to JPMorgan strategists Eric Beinstein and Nathaniel Rosenbaum. Hedging costs may have come down, but Japanese government bond yields have risen significantly this year, touching highs not seen in more than a decade. The growing riskiness in US corporate bonds can make credit look comparatively less interesting.

"Credit markets usually aren't this volatile," said Tetsuji Saito, a portfolio manager at Gunma Bank Ltd. in Japan. "We're watching spreads, but it's a hard market to enter right now with US rates moving so sharply."

In Europe, hedging costs have surged, recently touching their highest since March 2023. They are expected to edge even higher as the Federal Reserve and the European Central Bank continue on divergent interest-rate paths, the JPMorgan strategists said. Asset managers on the continent have been dialing back their exposure to US credit in part as a result.

To be sure, many investors have global mandates, which means they will continue to buy US corporate debt even if they pare back. Demand has also remained strong for newly issued bonds in the US, suggesting broad appetite for the asset class.

For now, foreign investors appear to be on the fence about the US corporate bond market, said Goldman Sachs' Karoui, whose been meeting investors in Asia and Europe in recent weeks.

"It's a very hard to invest in this environment," said Karoui in an interview. "What will matter for the next two to three months is really assessing the magnitude of the damage that was done to the economy from this significant dose of uncertainty."

--With assistance from Finbarr Flynn.

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