(Bloomberg) — Whether you’re talking to Europe’s biggest money manager, Australia’s giant pension funds, or a cash-rich Japanese insurer, you’ll hear a resounding message when it comes to U.S. Treasuries: they are still difficult to obtain. beat.
Four months after new Vice Chairman JD Vance said he feared Treasuries could face a possible “death spiral” if bond vigilantes sought to drive up yields, companies like Legal & General Investment Management and Amundi SA say they are ready to grant the advantage to the new administration. doubt.
There are many reasons why global funds are buying, even though Treasuries are mired in a historic bear market. The securities offer a huge yield premium over bonds in countries like Japan and Taiwan, while Australia’s fast-growing superannuation sector adds Treasuries every month due to the depth and liquidity of the market . The United States also appears to be a safer bet than some European sovereign markets which are themselves struggling with fiscal problems.
Investors were also reassured by Trump’s nomination of hedge fund manager Scott Bessent as Treasury secretary, tasked with overseeing government debt sales. Bessent, whose Senate confirmation hearing is scheduled for Thursday, aims to reduce the deficit as a percentage of gross domestic product through tax cuts, spending controls, deregulation and cheap energy.
“When it comes to the risk of a ‘death spiral,’ any bond market can find itself caught in a mutually reinforcing cycle of higher yields and higher debt projections,” said Chris Jeffery, head of macro strategy and asset management at Legal & General Investment, the British company. the largest asset manager. But “the new Treasury secretary has talked about aiming for a 3% deficit in 2028. Bond investors have no reason to go on strike if the federal government adopts such aspirations.”
The position of foreign investors in Treasury bonds is more important than ever. Foreign funds held $7.33 trillion in long-term U.S. debt at the end of October, about a third of the outstanding amount, and just below the record $7.43 trillion they held in September, according to the latest data of the American government.
At the heart of the debate over whether to continue buying Treasuries is the largest U.S. federal deficit outside of extreme periods such as the pandemic and global financial crisis. There are a number of signs that investors are getting nervous. Benchmark US 10-year yields have jumped more than a percentage point from September’s low and are once again threatening to surpass the key psychological level of 5%.
Yields on 10-year bonds were little changed Thursday after falling 14 basis points to 4.65% the day before in response to subdued U.S. inflation data – the first decline in nine days.
Japanese investors – the largest foreign holders of Treasuries – are aware of the growing risks but remain enthusiastic buyers.
“The prevailing market view is that the US Treasury market is too large and liquid and that US seigniorage is too deeply entrenched to undermine the central role of Treasuries in global central bank reserves,” he said. said Naomi Fink, chief global strategist at Nikko Asset Management in Tokyo. .
“In our central scenario, we expect the adjustment in U.S. Treasury yields to proceed in an orderly manner. However, the likelihood of a more disruptive adjustment, while still low, has in our view increased,” she said.
One reason Japanese investors favor Treasuries is that they offer exposure to the all-conquering dollar. The country’s funds would have earned a return of 12% on their unhedged Treasury investments in 2024, of which no less than 11.5% would be due to the appreciation of the greenback.
View from Europe
European funds are also largely optimistic, saying a rise in Treasury yields is unlikely, especially as Trump appears cognizant of the need to keep global investors on their toes.
Markets expect the new administration to result in higher growth and inflation in the United States, which has caused the yield curve to steepen, but it actually makes Treasuries more attractive, said Anne Beaudu, deputy director of global aggregates strategies at Amundi.
“US bonds look more attractive at these levels as rising yields will eventually weigh on growth prospects or the performance of risky assets and the bar for rising rates remains very high,” she said. “But the market will certainly remain cautious until we have more clarity on Trump’s agenda.”
At least some global funds are cautious about Treasuries as U.S. debt rises.
The budget deficit reached $1.83 trillion for the fiscal year ending in September, according to the latest data released in October. The deficit is expected to widen further if Trump keeps his promises to cut taxes and increase spending.
“The curve will remain very steep with a lot of new issues coming into the market, which will once again have a negative effect on Treasuries,” said Kaspar Hense, senior portfolio manager at RBC Bluebay Asset Management in London. There is at least some chance of a rise in US yields, similar to that seen in the UK during Prime Minister Liz Truss’s term in 2022, he said.
The sell-off in Treasuries in recent weeks, however, convinced BlueBay to scale back some of its bets that 30-year yields would be lower than two-year yields, the company said this week.
Marie-Anne Allier, a portfolio manager at Carmignac in Paris, said in an interview with Bloomberg TV that the firm prefers shorter-term bonds, with long-term bonds being more vulnerable.
“There is no better place”
Investors in China, the second-largest holder of U.S. debt abroad, view the prospect of a Treasury collapse as marginal.
“While concerns about rising borrowing costs and fiscal pressures in the United States are legitimate, the risk of a catastrophic bond market collapse is quite low,” said Ming Ming, chief economist in Beijing at Citic Securities Co. of China’s largest brokerage houses.
“In the event of unnecessary volatility in the US bond market, the Fed still has many tools to stabilize it and manage liquidity. This will help alleviate pressures,” he said.
Investors in Taiwan also continue to invest in US debt.
“Momentum has not slowed despite expectations of slower or lower rate hikes and talk of the ‘death spiral.’ In fact, we are seeing money continue to flow as yields are increasing,” said Julian Liu, president of Yuanta Securities Investment Trust. , the island’s largest local asset manager.
“For most Taiwanese investors, the conclusion could probably be that there is no better place to invest.”
–With help from Chien-Hua Wan, Liz Capo McCormick, Jing Zhao, Masaki Kondo, Mia Glass, Alice Atkins, Betty Hou and Iris Ouyang.
(Updated with Carmignac’s comment in paragraph 20.)
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