(Bloomberg) — Whether you’re talking to Europe’s biggest money manager, Australia’s giant pension funds or a cash-rich insurer in Japan, there’s one resounding message you’ll hear when it comes to Treasuries of the United States: they are still hard to find. to beat
Four months since incoming vice-chairman JD Vance said he was concerned the Treasury faced a potential “death spiral” if bond watchdogs sought to raise yields, firms including Legal & General Investment Management and Amundi SA they say they are ready to give the benefit to the new administration. of doubt
There are many reasons why global funds buy even when Treasuries are in a historic bear market. Securities offer a huge yield premium over bonds in places like Japan and Taiwan, while Australia’s fast-growing pension industry adds Treasuries every month because of the depth and liquidity of the market. The US also looks like a safer bet than some European sovereign markets that are struggling with fiscal issues of their own.
Investors also took comfort from Trump’s nomination of hedge fund manager Scott Bessent to be his Treasury secretary, overseeing sales 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 restraint, deregulation and cheap energy.
“With the risk of a ‘death spiral,’ any bond market can become trapped in a mutually reinforcing cycle of higher yields and higher debt projections,” said Chris Jeffery, head of macro strategy, asset management of Legal & General Investment, the United Kingdom. major asset manager. But, “the incoming Treasury secretary has talked about a 3% deficit target by 2028. Bond investors have no reason to strike if the federal government adopts those aspirations.”
The position of foreign investors towards Treasuries 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 data from the US government.
At the center of the debate over whether to keep buying Treasuries is the largest U.S. federal deficit outside of extreme periods like the pandemic and global financial crisis. There are a number of signs that investors are getting nervous. Benchmark US 10-year yields are up more than a percentage point from September lows and threaten to breach the key psychological 5% level once 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 drop in nine days.
Investors in Japan, the biggest holders of Treasuries abroad, are aware of the growing risks but remain eager buyers.
“The prevailing view in the markets is that the US Treasury market is too large and liquid and that US sovereignty is too entrenched to undermine the central role of Treasuries in global central bank reserves,” he 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,” he said
One reason Japanese investors favor Treasuries is that they offer exposure to the all-conquering dollar. Country funds would have earned a 12% return on their unhedged Treasury investments by 2024, with no less than 11.5% due to greenback appreciation.
View from Europe
European funds are also very bullish, saying that any rise in Treasury yields is unlikely, especially as Trump seems aware of the need to keep global investors on his side.
Markets expect the new administration to mean higher U.S. growth and inflation, which has flattened the yield curve, but that makes Treasuries more attractive, said Anne Beaudu, deputy head of ‘aggregate global strategies of Amundi.
“US bonds look more attractive at these levels, as rising yields will ultimately affect the growth outlook or returns on risky assets, and the bar for raising rates remains very high,” he said “But the market will certainly remain cautious until we get more clarity on Trump’s agenda.”
At least some global funds are cautious about Treasuries as the US debt pile grows.
The budget deficit widened to $1.83 trillion for the fiscal year that ended in September, according to the latest data released in October. The deficit is expected to increase further if Trump follows through on his promises to cut taxes and increase spending.
“The curve will continue to be very steep with a lot of new issuance coming into the market, and that feeds back into negative 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 tenure in 2022, he said.
The selloff in Treasuries in recent weeks, however, has convinced BlueBay to scale back some of its bets that 30-year yields will underperform 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-dated notes, as the longer is more vulnerable.
“There is no better place”
Investors in China, the second-largest holder of US debt abroad, see the prospect of a Treasury slide as marginal.
“Even if concerns about higher borrowing costs and fiscal pressures in the US are legitimate, the chance of seeing a catastrophic collapse of the bond market is quite low,” said Ming Ming, chief economist at Citic Securities Co. Beijing. of the largest corridors in China.
“If there is any unnecessary volatility in the U.S. bond market, the Fed still has many tools to stabilize it and manage liquidity. That will help ease the pressures,” he said.
Taiwanese investors also continue to put money into US debt.
“Momentum has not slowed despite expectations of slower or smaller rate hikes and chatter around the ‘death spiral,’ in fact we’re seeing money continue to flow as it rises returns,” said Julian Liu, president of Yuanta Securities Investment Trust. , the island’s largest local asset manager.
“For most investors in Taiwan, the bottom line might be that there is no better place to invest.”
–With assistance from Chien-Hua Wan, Liz Capo McCormick, Jing Zhao, Masaki Kondo, Mia Glass, Alice Atkins, Betty Hou and Iris Ouyang.
(Updates with Carmignac’s comment in paragraph 20.)
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