(Bloomberg) -- Credit investors have spent much of the year wondering when foreign demand for high-grade US corporate bonds will wane, but so far it is showing signs of strengthening as the macro outlook for the American economy improves.

During the first quarter of 2024, overseas investors poured $187 billion into US company notes, according to Torsten Slok, chief economist at Apollo Global Management. That’s a 61% jump from the same time last year. 

Overseas investors may still be getting encouragement from an improving macroeconomic outlook for the US. Spending has proven resilient, and a report this week showed inflationary pressures moderating. The odds of the US economy contracting have dropped to 13% in the latest Bloomberg survey of economists from 38% in March. At the same time, market turbulence has emerged in France after President Emmanuel Macron’s decision to call a snap election, hitting bank bonds for the nation, among others. 

Demand from Asian investors and to a lesser extent Europeans has been a key support for US dollar corporate bonds, stocks and money-market funds this year. For company debt, the voracious appetite has helped absorb this year’s near record supply, up about 20% from this time last year. 

With yields over 5% in the blue-chip debt market, there has even been a pickup in bond-buying activity from traditionally less active regions, including the Middle East and South America, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. 

“Foreign demand is important to the investment-grade bond market now,” he said. “It’s buoying demand.” 

The costs of hedging have edged lower for investors based in Japan, and are stabilizing after an upward stretch for Eurozone investors. 

To be sure, US 10-year Treasury yields have been rapidly falling since late April, highlighting a potential risk here: that foreign demand could wane as investors find higher yields back home. And any surprise moves from the Federal Reserve could result in higher hedging costs, according to JPMorgan Chase & Co. credit strategist, Nathaniel Rosenbaum, a negative for demand.

“There is a lot riding on the next few Fed meetings as it relates to continued demand for US credit from foreign investors,” Rosenbaum said in an interview.

For now, the Fed has held onto its stance of keeping borrowing costs elevated for longer by penciling in just one rate cut this year, which should keep yield-hungry investors interested in the US corporate debt market. The average yield on a high-grade US corporate bond was 5.33% as of Thursday, according to Bloomberg index data. 

And demand from overseas will persist as long as US companies issue longer-dated debt, said David Del Vecchio, co-head of US investment-grade corporate bonds at PGIM Fixed Income. US debt currently makes up 75% of the long-dated corporate-bond market, he said.

“If you’re interested in investment-grade corporate bonds in the long end of the market, you kind of have to buy the US because we’re such a big part of the global market,” he said in an interview. “So, we continue to benefit from that fact and continue to see demand come into our market.”

(Adds average yield in 10th paragraph. A previous version of this story corrected Del Vecchio’s title in next-to-last paragraph)

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