In the age of Trump, America's
biggest foreign creditors are suddenly having second thoughts about financing
the U.S. government.
In Japan, the largest holder of
Treasuries, investors culled their stakes in December by the most in almost
four years, the Ministry of Finance's most recent figures show. What's striking
is the selling has persisted at a time when going abroad has rarely been so
attractive. And it's not just the Japanese. Across the world, foreigners are
pulling back from U.S. debt like never before.
From Tokyo to Beijing and London,
the consensus is clear: Few overseas investors want to step into the $13.9
trillion U.S. Treasury market right now. Whether it's the prospect of bigger
deficits and more inflation under President Donald J. Trump or higher interest
rates from the Federal Reserve, the world's safest debt market seems less of a
sure thing — particularly after the upswing in yields since November. And then
there is Mr. Trump's penchant for saber rattling, which has made staying home that
“It may be more difficult than
usual for Japanese to invest in Treasuries and the dollar this year because of
political uncertainty,” said Kenta Inoue, chief strategist for overseas bond
investments at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “Treasury
yields may rise rapidly again in the near future, which will continue to
discourage them from buying aggressively.”
Nobody is saying that foreigners
will abandon Treasuries altogether. After all, they still hold $5.94 trillion,
or roughly 43% of the U.S. government debt market. (Though that's down from 56%
in 2008.) A significant drawdown can harm major holders like Japan and China as
much as it does the U.S.
And, of course, homegrown demand
has of late been able to absorb the pickup in overseas selling. Since reaching
2.64% in mid-December, yields on benchmark 10-year notes have come back and are
essentially flat this year. They were at 2.43% Monday.
Nevertheless, any consistent
drop-off in foreign demand could have lasting consequences on America's ability
to finance itself cheaply, particularly in light of Mr. Trump's ambitious plans
to boost infrastructure spending, cut taxes and put “America First.” The
president has singled out Japan and China, the two biggest overseas creditors,
as well as Germany, for devaluing their currencies to gain an unfair advantage
In December, Japanese investors
reduced their investments in U.S. debt by 2.39 trillion yen ($21.3 billion)
after a smaller pullback in November. While only a fraction of Japan's $1.1
trillion of holdings, they were the first back-to-back declines since the start
of 2014. China, which owns just over $1 trillion of Treasuries, has been selling
since May. Its holdings are at a seven-year low.
For now, risk-averse bond buyers
like Daiwa SB Investments's Shinji Kunibe are cutting back on Treasuries,
despite some clear advantages.
Like many institutional money
managers that invest abroad, Mr. Kunibe, Daiwa SB's head of fixed-income
management, likes to hedge away the risk of the dollar's ups and downs. And
right now, it makes sense. After accounting for hedging costs, 10-year Treasuries
yield about 0.9%, roughly 10 times the return offered by Japanese government
bonds. Going back to the 1980s, Treasuries have rarely enjoyed such a big edge
However, he sees U.S. yields
rising further as Mr. Trump pursues expansionary fiscal policies and takes a
protectionist stance on trade.
“Yields are going to be in an
uptrend,” he said.
And investors like Mr. Kunibe can
ill-afford more losses. Last quarter, Japanese investors who hedged all their
dollar exposure in Treasuries suffered a 4.7% loss — the biggest in at least
three decades, data from Bank of America showed. The same thing happened in
Europe, where record currency-hedged losses also stung euro-based buyers.
“It was a deer in the headlights
moment,” said Zoltan Pozsar, a research analyst at Credit Suisse.
Combined with the
unpredictability of Mr. Trump's tweet storms, interest-rate increases in the
U.S. could further sap overseas demand. Mark Dowding, who helps oversee about
$50 billion as co-head of investment-grade debt at BlueBay Asset Management in
London, said the firm has already moved to insulate itself from further losses
due to higher rates.
What's more, central bankers in
Japan and Europe are still experimenting with monetary policies that may
benefit bond investors locally.
Right now, it's just “much easier
to stay home than go abroad,” said Shyam Rajan, Bank of America's head of U.S.
here for the original article from Investment News.