(Bloomberg) -- Whether you talk to Europe’s largest money managers, Australia’s big pension funds or Japan’s cash-rich insurance companies, when it comes to U.S. Treasuries, you’ll hear a resounding message: They’re still strong Hard to beat.
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Four months ago, incoming Vice President J.D. Vance said he feared Treasuries could face a "death spiral" if bond vigilantes try to push yields higher, firms including Legal & General Investment Management and Amundi SA said. There are doubts about their willingness to bring benefits to the new government.
Even as U.S. Treasuries are mired in a historic bear market, global funds still have good reasons to buy. These securities offer huge yield premiums over bonds in places like Japan and Taiwan, while Australia's fast-growing superannuation industry is adding to its treasury bonds every month due to the depth and liquidity of the market. The United States also looks safer compared with some European sovereign markets that are grappling with their own fiscal problems.
Trump also cheered investors by nominating hedge fund manager Scott Bessent as Treasury secretary to oversee the government's debt sales. Bessant, whose confirmation hearing is scheduled for Thursday in the Senate, aims to reduce the deficit as a share of gross domestic product through tax cuts, spending restraints, deregulation and cheap energy.
"In terms of the risk of a 'death spiral', any bond market could be caught in a mutually reinforcing cycle of rising yields and rising debt forecasts," said Chris Jeffery, head of macro strategy at Legal & General Investment Asset Management in the UK, the largest asset manager. However, "the incoming Treasury secretary has talked about a 3% deficit target by 2028. If the federal government adopts such aspirations, bond investors will have no reason to strike."
Overseas investors' stance on Treasuries 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 amount outstanding, according to the latest U.S. government data, down slightly from the record $7.43 trillion held in September. Dollar.
At the heart of the debate over whether to continue buying Treasury bonds is the fact that the U.S. federal deficit is the largest outside of extreme periods like the pandemic and the global financial crisis. There are many signs that investors are becoming uneasy. The benchmark 10-year U.S. Treasury yield has jumped more than a percentage point from its September lows and is on track to breach the psychologically critical 5% level again.
The 10-year Treasury yield was little changed on Thursday, its first decline in nine days, after falling 14 basis points the previous day to 4.65% on favorable U.S. inflation data.
Japanese investors, the largest overseas holders of U.S. Treasuries, are aware of rising risks but are still keen to buy.
Naomi Fink, chief global strategist at Nikko Asset Management in Tokyo, said: "The prevailing view in the market is that the U.S. Treasury market is too large, too liquid, and the U.S. seigniorage is too entrenched to weaken the role of U.S. Treasuries in global central banks. central role in reserves.”
"In our core scenario, we expect the correction in Treasury yields to be orderly. However, we believe the likelihood of a more disruptive correction, while still small, has increased."
One reason Japanese investors favor U.S. Treasuries is that they provide exposure to the all-conquering dollar. By 2024, the country's funds will earn a return of 12% on unhedged Treasury bond investments, with a return of no less than 11.5% due to the appreciation of the U.S. dollar.
View from Europe
European funds are also largely optimistic, saying U.S. Treasury yields are unlikely to rise, especially as Trump appears to recognize the need to keep global investors on the sidelines.
Anne Beaudu, deputy head of global overall strategy at Credit Agricole, said the market expects the new government to mean higher U.S. economic growth and inflation, which has led to a steeper yield curve, but this actually makes U.S. Treasury bonds more attractive.
“U.S. bonds appear more attractive at these levels because rising yields will ultimately impact growth prospects or risk asset performance and the bar for a rate hike remains high,” she said. “But until we have more clarity on Trump The market will definitely remain cautious ahead of the agenda.”
At least some global funds are wary of U.S. Treasuries as the size of U.S. debt grows.
The budget deficit surged to $1.83 trillion for the fiscal year ending in September, according to the latest data released in October. If Trump follows through on his promises to cut taxes and increase spending, the gap is expected to widen further.
Kaspar Hense, senior portfolio manager at RBC Bluebay Asset Management in London, said: “With a lot of new issuance coming into the market, the curve will remain very steep, which will again be a factor in the U.S. Treasuries have a negative impact. "There is at least a possibility of a spike in U.S. yields similar to what happened in 2022 under British Prime Minister Liz Truss," he said.
However, BlueBay said this week that the selloff in U.S. Treasuries in recent weeks had convinced it to pare some of its bets that the 30-year note would yield less than the two-year note.
Marie-Anne Allier, a portfolio manager at Carmignac in Paris, said in an interview with Bloomberg TV that the company prefers short-term notes, while longer-term notes are more vulnerable.
“There is no better place to be”
As the second-largest overseas holder of U.S. Treasuries, Chinese investors see little prospect of a U.S. Treasury collapse.
"Even if concerns about rising U.S. borrowing costs and fiscal pressure are legitimate, the likelihood that we will see a catastrophic collapse in the bond market is quite low," said Ming Ming, chief economist at CITIC Securities in Beijing, one of China's largest brokerages.
"If there is any unnecessary volatility in the U.S. bond market, the Fed still has a lot of tools to stabilize the market and manage liquidity. This will help ease the pressure." He said.
Taiwanese investors also continue to put money into U.S. debt.
Julian Liu, chairman of Yuanta Securities Investment Trust, said: "Despite expectations that interest rate hikes will be slower or smaller, and discussions surrounding a 'death spiral' continue, the momentum has not slowed down. In fact, As yields rise, money continues to pour in,” the island’s largest local asset manager.
"For most Taiwanese investors, the conclusion is probably that there is no better place to invest."
--With assistance from Jianhua Wan, Liz Capo McCormick, Jing Chao, Masaki Kondo, Mia Glass, Alice Atkins, Betty Hou, and Iris Ouyang.
(Updated Carmignac's comments in paragraph 20.)
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