Decline in foreign demand for U.S. corporate debt likely to continue - Citi

Investing.com - A recent weakening in foreign demand for U.S. corporate debt is likely to continue after recent market ructions caused by President Donald Trump’s sweeping tariffs, according to analysts at Citi.

Overseas investors increased holdings of U.S.-issuer corporate bonds to $18.3 billion in March, although it remained well below the $60 billion of inflows notched in the same month a year ago, Citi estimates showed.

Relatively tepid foreign appetite has in turn required domestic investors to haul in a greater share of U.S. corporate bond supply compared to the previous two years, Citi said.

About 24% of an estimated $206 billion in first quarter net supply was absorbed by overseas buyers, versus 47% in 2024, 64% in 2023, and a long-run average of around 40%, the brokerage added.

"Tariff headlines were relatively lighter in March compared to February, resulting in resumed confidence from foreign investors in U.S. credit markets," the Citi analysts wrote. "However, with the announcement of reciprocal tariffs in April on U.S. trading partners and the resulting market volatility, this decline in demand for U.S. corporates from foreign investors is likely to continue."

They flagged that the outlook for foreign flows beyond the horizon of official data, which often lags by two months, "shows further signs of weakness", including large outflows for Taiwanese foreign bond exchange-traded funds in April. Still, the Citi analysts said these can be "noisy predictors" that have previously sometimes not been reflective of flows.

The comments come as debate has swirled around the persistence of a so-called "Sell America" narrative in bond markets, particularly after Moody’s downgraded its rating of U.S. government debt last week. The ratings agency noted worries over America’s $36.2 trillion debt pile, which analysts say could be set to expand even further should U.S. lawmakers pass Trump’s massive tax and spending bill.

On Wednesday, the yields on the 20-year Treasury bonds touched their highest levels since 2023 after a lackluster auction of the debt. Yields, which tend to move inversely to prices, also rose for 30-year Treasury note.