Foreign demand for US corporate bonds is holding up despite this year's bond market selloff. European investors have been the biggest buyers, outpacing Asia by more than two to one. Goldman Sachs says the world's biggest credit market has few real alternatives.
Investors have worried that higher yields would drive foreign buyers out of the US corporate bond market. So far, that hasn't happened.
Despite a sharp rise in Treasury yields this year, foreign demand for US corporate bonds has remained robust, according to Goldman Sachs.
Through the end of June, net foreign purchases of US corporate bonds totaled $251 billion, putting 2026 on pace to nearly match last year's record $392 billion, according to Lynam's analysis.
"This is notable as the foreign appetite for US credit has persisted despite a range of headwinds in recent years, including fluctuations in the strength of the dollar and the cost of hedging," Amanda Lynam, the chief credit strategist at Goldman Sachs, wrote in a Tuesday note.
Foreign investors own about 29% of the US corporate bond market, making them a crucial source of demand.
Goldman's note comes as investors assess whether higher borrowing costs will put further pressure on the bond market ahead of the Federal Reserve's policy decision on Wednesday.
The benchmark 10-year Treasury yield closed at 5% on Tuesday after hitting its highest level since 2007 as investors increasingly expect interest rates to stay higher for longer.
Japan's pullback may not matter
Since early 2022, European investors have accounted for 52% of net foreign purchases of US corporate bonds, more than double Asia's 21% share.
Even so, recent market attention has centered on Japan, where investors have watched whether rising domestic bond yields and policymakers' calls for greater investment at home would prompt institutions to shift money back to Japanese assets.
However, Lynam expects any further reductions in Japanese holdings of US investment-grade and high-yield bonds to be "manageable in the context of the broader market."
Despite higher Treasury yields, Japan's policy shift, and years of debate over foreign demand for US assets, Goldman says there are still few alternatives to the size and depth of the US corporate bond market.
"We continue to expect a floor to remain under foreign purchases of US-domiciled credit, and view a broader repatriation of flows as unlikely," Lynam wrote.
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