After last week’s auctions, in which the US government sold off $66 billion in longer dated securities, it has been revealed that overseas central banks have taken a larger stake in US Treasury debt.
Information released by the Federal Reserve this week, shows that overseas central banks now hold $2.823 trillion worth of US debt, up $11.89 billion after the last auction. This increase marks the single largest weekly jump since a $22.41 billion leap in the week ending the 20th June, which coincided with last months auction of similar three-year, 10-year and 30-year maturities.
The increased investment in ‘safe-haven’ debt comes off the back of discouraging news concerning the state of the US economy, as investors steer clear of risky investments outside of Treasuries. News of an increase in weekly jobless claims, a poor showing in manufacturing industries and a downward turn in house sales, all suggest a weakening of growth in the economy in the months ahead.
The figures reflect the general interest in US Treasury debt from overseas banks, particularly those in Asia, who have been increasingly large buyers in recent years.
While China and Japan are the two biggest holders of Treasuries, overseas banks now own a quarter of all marketable Treasuries. The demand for products that deal in government debt or, more specifically, government debt that is perceived as a safe investment, has been incredibly large in recent months.
The movements in the Japanese yen has been of interest to many macro hedge fund managers such as Tudor Funds or Moore Capital Management, who make investments based on whether they calculate markets will improve over the coming months.
The increased investment in ‘safe-haven’ debt comes off the back of discouraging news concerning the state of the US economy, as investors steer clear of risky investments outside of Treasuries. News of an increase in weekly jobless claims, a poor showing in manufacturing industries and a downward turn in house sales, all suggest a weakening of growth in the economy in the months ahead.
However, Treasury sales look fantastic compare to the recent auctions of Spanish public debt, with the government struggling to interest investors and its 10 year yield getting ever nearer to 7%. In contrast, later this afternoon, the Treasury Department is hoping to sell $15 billion at an incredibly low borrowing cost. This will see the government selling 10-year Treasury Inflation Protected Securities, which have recently yielded around -0.62% in four other similar auctions.
These low yields are a sign that investors fear the worst on global markets and may reflect deep concern over further fallout from the eurozone crisis. With further eurozone bailouts expected in the near future, many investors are taking a ‘wait and see’ approach.
The trend for such government bonds has been seen across a variety of economies, in particular the sale of German Bunds. For the first time ever, Berlin sold two year Bunds at negative yields earlier in the week. However, many analysts feel that the US Treasury market in particular is showing signs of stumbling and slowing. William O’Donnell, head of U.S. government bond strategy at RBS Securities argues that in recent days there has been observed in the market a “better balance of buyers and sellers, suggesting that the rally in Treasuries is running on tired legs.”[1]
The Federal Reserve’s report also detailed a drop in foreign banks’ holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae and Freddie Mac. The drop was reported at $5.52 billion, leaving overall holdings level at around $693 billion.
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