The past year has seen a Chinese currency devaluation, a ratehike by the Federal Reserve, Brexit and a failed coup.

But after risk premiums on the debt sold by U.S. companiesjumped amid the oil price downturn and the market turmoilthat characterized the start of 2016, spreadson investment-grade corporate bond have now tightened to rightwhere they were 12 months ago, a Bank of America Merrill Lynch teamled by Hans Mikkelsen observes. Investors in bonds sold by U.S.companies with relatively stronger balance sheets might have onebig group to thank for the ability of their market to buck agrowing laundry list of potential headwinds.

“Aside from a positive macro environment, as equities aresetting new record highs, we continue to think foreign buyingrepresents the biggest tailwind for our market,” according tothe strategists, who have dubbed overseas purchases of U.S.corporate debt the “electronics for bonds” trade. They explain that“We continue to expect that the U.S. effectively will finance the[current account] deficit in 2016 by selling $400-500 billion ofcorporate bonds to foreign investors” — a figure which happens toclosely align with the $500 billion or so trade deficit the U.S.runs in electronic equipment. “Hence the trade is electronics forcorporate bonds.”

In late 2015, Mikkelsen predicted that an expansion of monetarystimulus by the European Central Bank would ultimately displacesome investors from the European corporate debt market — and they'dhave no choice but to scurry across the Atlantic to search fortheir yield.

Foreign appetite for U.S. corporate debt may be magnified byrecent ultra-low returns on benchmark government debt — which havehelped bolster stocks and other risk assets — as well ascurrency fluctuations. Analysts at Citigroup, for instance, pointout that Japan, an electronics exporter whose stable of offeringsincludes Nintendo Co., Toshiba Corp., and Sony Corp. product, hasbeen taking advantage of a stronger yen to import overseas bonds onthe cheap(ish). The island nation's purchases of foreign debtsurged to a weekly record in the seven days ending July 8,according to Citigroup figures.

In other words, there's still plenty of evidence to supportMikkelsen's call that investment-grade spreads will tighten to 135basis points before the year is out.

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