Why Foreign Investors Keep Buying US Corporate Bonds Despite 5% Treasury Yields

Foreign investors have continued pouring money into U.S. corporate bonds even as Treasury yields have surged to their highest levels in years, challenging expectations that higher borrowing costs and currency-hedging expenses would push overseas investors away from American credit markets.

Net foreign purchases of U.S. corporate bonds reached $251 billion through the end of June, putting 2026 on track to approach last year’s record $392 billion, according to an analysis by Goldman Sachs chief credit strategist Amanda Lynam.

The resilience of overseas demand is notable because the benchmark 10-year Treasury yield closed at 5% on Tuesday after reaching its highest level since 2007. The move has intensified concerns about how much further yields could rise and whether expensive U.S. borrowing costs could weaken demand for dollar-denominated assets.

So far, foreign investors have continued buying.

“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,” Lynam wrote in a Tuesday note.

Foreign investors own roughly 29% of the U.S. corporate bond market, giving them an important role in determining demand and financing conditions for American companies.

Their continued participation suggests that higher Treasury yields have not yet fundamentally altered the relative attractiveness of U.S. corporate credit. Instead, overseas investors appear willing to absorb higher rates in exchange for the income and liquidity available in the world’s largest corporate bond market.

Higher Yields Have Not Broken Foreign Demand

The resilience of foreign demand comes at a critical point for U.S. fixed-income markets. Investors are assessing whether higher borrowing costs will put additional pressure on corporate bonds and other risk assets as they await the Federal Reserve’s policy decision on Wednesday. The rise in Treasury yields has already increased the benchmark against which corporate borrowing costs are priced.

Normally, a sharp increase in domestic yields can create several obstacles for foreign investors. Higher Treasury rates can make other markets relatively more attractive, while a stronger or more volatile dollar can alter returns for investors whose portfolios are denominated in other currencies. Currency hedging can further reduce the effective yield earned by overseas buyers.

Those forces have generated repeated predictions that foreign investors would eventually reduce their exposure to U.S. assets.

The data have not yet supported that outcome.

Europe has been the biggest source of foreign demand for U.S. corporate bonds since early 2022, accounting for 52% of net foreign purchases, according to Goldman. Asia accounted for 21%.

The figures also put the focus on Japan, where domestic bond yields have risen as policymakers have moved away from the ultra-loose monetary conditions that for years encouraged Japanese institutions to invest abroad.

A sustained increase in Japanese government bond yields could make domestic assets more competitive and encourage insurers, pension funds and other institutions to repatriate capital. That possibility has been closely watched by U.S. bond investors because Japanese institutions have historically been major participants in global fixed-income markets.

Goldman, however, expects any further decline in Japanese holdings of U.S. investment-grade and high-yield corporate bonds to remain manageable relative to the overall market. That assessment rests partly on the sheer scale and liquidity of the U.S. corporate bond market.

Few Alternatives Match the U.S. Market

For international investors, the decision is not simply whether U.S. yields have become more expensive. It is also what assets can replace them.

The U.S. corporate bond market offers a combination of scale, liquidity, credit diversity, and tradability that is difficult to reproduce elsewhere. Large institutional investors can deploy substantial amounts of capital across investment-grade and high-yield securities without necessarily sacrificing the ability to trade.

That market depth comes to the fore when investors are managing large portfolios. A modest improvement in the relative attractiveness of domestic bonds may not be sufficient to justify moving hundreds of billions of dollars out of a market that offers a much broader pool of issuers and securities.

Goldman therefore expects a floor to remain under foreign purchases of U.S.-domiciled credit and considers a broad repatriation of overseas capital unlikely.

“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.

The distinction between foreign demand for Treasuries and demand for corporate credit is also important. Corporate bonds offer investors additional compensation for taking credit risk, meaning that higher Treasury yields can actually provide a larger overall income opportunity when corporate spreads remain contained.

That does not make the market immune to a further rise in rates. If Treasury yields remain elevated, companies refinancing debt will face higher interest expenses, while existing bonds can suffer price declines as newly issued securities offer higher coupons. A deterioration in economic conditions could also widen corporate credit spreads and increase losses for investors.

But the foreign-flow data suggest that those risks have not yet been sufficient to trigger a broad withdrawal.

The bigger test may come if high Treasury yields persist rather than simply rise temporarily. A 5% 10-year yield changes the economics of global portfolios more substantially when investors believe rates will remain elevated for years. It can also alter corporate financing decisions, equity valuations and the relative appeal of other developed-market bonds.

For now, however, foreign investors appear to be treating the higher U.S. yield environment as an opportunity rather than a reason to abandon the market. That leaves U.S. corporate borrowers with an important source of external demand even as domestic financial conditions tighten. It also suggests that the long-running concern over foreign investors turning away from U.S. assets may be more complicated than a simple comparison of Treasury yields.

The dollar, hedging costs, domestic yields, and geopolitical considerations all matter. But so does market structure. Until another market can offer comparable scale and liquidity, Goldman expects foreign capital to keep finding its way into U.S. corporate credit.