Global Investors Still Bullish on US Treasuries
Despite concerns about the US federal deficit and rising yields, global investors remain confident in US Treasuries. Europe’s largest money manager, Australia’s giant pension funds, and Japan’s cash-rich insurers are all willing to give the new administration the benefit of the doubt.
Yield Premium and Market Depth
One major reason for this confidence is the significant yield premium offered by US Treasuries compared to bonds in Japan and Taiwan. Additionally, the depth and liquidity of the US market make it an attractive option for investors. Australia’s rapidly growing pension industry, for example, is adding Treasuries to its portfolio every month.
A Safer Bet
The US is also seen as a safer bet than some European sovereign markets, which are grappling with their own fiscal problems. The nomination of Scott Bessent as Treasury secretary has also boosted investor confidence, as he aims to slash the deficit through tax cuts, spending restraint, deregulation, and cheap energy.
Overseas Investors Hold Significant Stake
Foreign funds hold a significant stake in US debt, with $7.33 trillion of long-term US debt held at the end of October. This is about a third of the outstanding amount and just below the record $7.43 trillion held in September.
Risks and Concerns
While investors are generally optimistic, there are risks and concerns. The largest US federal deficit outside of extreme periods such as the pandemic and the global financial crisis has raised concerns about the sustainability of the US debt. Benchmark US-year 10 yields have jumped more than a percentage point from September’s low, and are threatening to breach the key psychological level of 5%.
Japanese Investors Remain Eager Buyers
Despite these risks, Japanese investors remain eager buyers of US Treasuries. They are attracted to the dollar’s strength and the yield premium offered by US bonds. In fact, Japanese funds would have reaped a return of 12% on their unhedged Treasury investments in 2024, with 11.5% of that due to the greenback’s appreciation.
European Funds Cautiously Optimistic
European funds are also largely optimistic, saying any spike up in Treasury yields is unlikely, especially as the new administration appears aware of the need to keep global investors onside. Markets are anticipating higher US growth and inflation, which has caused the yield curve to steepen, making Treasuries more alluring.
Cautious Voices
However, not all investors are convinced. Some global funds are cautious on Treasuries as the US debt pile grows. The budget deficit is forecast to swell further if the new administration carries out its pledges to cut taxes and boost spending.
Chinese and Taiwanese Investors
Investors in China, the second-biggest overseas holders of US debt, view the prospect of a Treasury meltdown as marginal. They believe the Fed still has plenty of tools to stabilize the bond market and manage liquidity. Taiwanese investors are also continuing to put money into US debt, citing the lack of better investment options.
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