(Bloomberg) — Whether you talk to Europe's biggest money manager, Australia's giant pension funds or Japan's cash-rich insurer, when it comes to U.S. Treasuries, you'll hear a resounding message: They're still hard to come by. defeat.
Four months after incoming vice-chairman JD Vance said he was concerned the Treasury faced a possible “death spiral” if bond watchdogs tried to raise yields, firms including Legal & General Investment Management and Amundi SA say they are willing to provide new advantage to the administration. doubts.
There are plenty of reasons to buy global funds even as sovereign bonds languish in a historic bear market. The securities offer a huge yield premium over bonds in places like Japan and Taiwan, while Australia's fast-growing superannuation industry is adding government bonds every month because of market depth and liquidity. The US also looks safer than some of Europe's sovereign markets, which are struggling with their own fiscal problems.
Investors also cheered Trump's nomination of hedge fund manager Scott Bessent as his Treasury secretary to oversee the sale of government debt. Bessent, whose Senate confirmation hearing is scheduled for Thursday, aims to reduce the deficit as a share of gross domestic product through tax cuts, spending cuts, deregulation and cheap energy.
“Given the risk of a death spiral, any bond market can get into a mutually reinforcing cycle of higher yields and higher debt projections,” said Chris Jeffery, head of macro strategy, asset management at Legal & General Investment, UK. largest asset manager. But “the incoming finance minister has talked about targeting a 3% deficit in 2028. Bond investors have no reason to strike if the federal government embraces such aspirations.”
The attitude of foreign investors towards government bonds is more important than ever. Foreign funds held $7.33 trillion of long-term U.S. debt at the end of October, about a third of the amount outstanding, and just below the record $7.43 trillion they held in September, according to the latest U.S. government data.
At the heart of the debate over whether to continue buying Treasuries is the US's largest 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 lows and are threatening to breach the key psychological level of 5% again.
Yields on 10-year notes were little changed on Thursday after falling 14 basis points to 4.65% the previous day in response to benign US inflation data – the first decline in nine days.
Investors in Japan – the biggest foreign holders of government bonds – are aware of the rising risks but remain eager buyers.
“The prevailing view in the markets is that the US Treasury bill market is too large and liquid and the US sovereign is too deeply entrenched to undermine the central role of Treasuries in global central bank reserves,” said Naomi Fink, chief global strategist at Nikko Asset Management in Tokyo. .
“In our central scenario, we expect the adjustment in US Treasury yields to proceed in an orderly manner. However, the likelihood of a more disruptive adjustment, while still small, has increased in our view,” she said.
One reason Japanese investors favor government bonds is that they provide exposure to the all-conquering dollar. Funds in the country would reap a 12% return on their unhedged sovereign investments in 2024, with no less than 11.5% of that due to the appreciation of the dollar.
View From Europe
European funds are also largely bullish, saying any rise in government bond yields is unlikely, especially as Trump appears aware of the need to keep global investors on side.
Markets expect the new administration to mean higher growth and inflation in the US, which has caused the yield curve to steepen, but that actually makes government bonds more attractive, said Anne Beaudu, deputy head of global aggregate strategies at Amundi.
“US bonds look more attractive at these levels as rising yields will ultimately weigh on growth prospects or the performance of risk assets and the bar for rate hikes 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 wary of Treasuries as the U.S. debt pile grows.
The budget deficit rose to $1.83 trillion for the fiscal year ending in September, according to the latest figures released in October. The deficit is expected to grow further if Trump follows through on his pledge to cut taxes and increase spending.
“The curve will remain very steep as there will be a lot of new issues coming into the market, and that is again weighing on government bonds,” said Kaspar Hense, senior portfolio manager at RBC Bluebay Asset Management in London. There is at least some chance of a surge in US yields similar to that seen in the UK during Prime Minister Liz Truss's 2022 term, he said.
But a selloff in Treasuries in recent weeks has convinced BlueBay to trim some of its bets that 30-year yields will be lower than the two-year, the company said this week.
Marie-Anne Allier, a portfolio manager at Carmignac in Paris, told Bloomberg TV that the firm prefers shorter notes, with long ends more vulnerable.
“There's No Better Place”
Investors in China, the second-largest overseas holder of US debt, see the prospect of a Treasury meltdown as marginal.
“While concerns about higher borrowing costs and fiscal pressures in the US are legitimate, the chances of us seeing a catastrophic collapse of the bond market are quite low,” said Ming Ming, chief economist in Beijing at Citic Securities Co. of the largest Chinese brokerage firms.
“If there is any unnecessary volatility in the US bond market, the Fed still has plenty of tools to stabilize it and manage liquidity. This will help ease the pressures,” he said.
Investors in Taiwan also continue to put money into US debt.
“Momentum has not slowed despite expectations of slower or smaller rate hikes and chatter about a 'death spiral,' in fact we're seeing money keep coming in as yields rise,” said Julian Liu, chairman of Yuanta Securities Investment Trust. , the island's largest local asset manager.
“Most Taiwanese investors might conclude 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.
(Update with Carmignac's comment in paragraph 20.)
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