Foreign bond investors are ‘extremely concerned’ about US deficits while the risk of China and Japan dumping Treasurys looms largethedigitalchaps


Treasury Secretary Janet Yellen speaks during a news conference at the IMF and World Bank Annual Meetings at IMF headquarters, October 14, 2022 in Washington, DC.Drew Angerer/Getty Images

  • Foreign bond investors are “extremely concerned” about US deficits, a TD Securities analyst told Insider.

  • The warning comes amid signs that demand for US Treasury bonds is waning.

  • The possible dumping of US assets in Japan and China looms large over bond markets.

Foreign buyers are driving worries about demand in the Treasury-bond market, and massive federal deficits are a growing risk, according to TD Securities analyst Gennadiy Goldberg.

In an interview with Insider, he noted that yields were climbing globally, which could put upward pressure on US rates to stay competitive.

“It’s also not helped by the fact that we can’t seem to get our deficits under control, and they keep exploding,” he said. “And that’s not encouraging for anyone, especially across the ocean. All foreign investors that I’ve spoken to recently are extremely concerned about the trajectory of US deficits.”

The warning comes as government overspending is projected to keep pushing US debt up, with some observers even warning of some form of default in the future. In August, Fitch Ratings downgraded the US credit rating, citing a deterioration in fiscal governance.

To be sure, US bond yields retreated sharply over the past week after they hit 17-year highs last month amid a massive bond sell-off. But risks in the bond market persist, with several auctions of longer-dated Treasurys running into lackluster demand. A key test is coming up at the 10-year and 30-year bond auctions this Wednesday and Thursday.

Meanwhile, a key advisory group to the Treasury Department warned in a report last week that there are early signs of weakening demand, just as the supply is due to ramp up.

US Treasury demand is hitting another headwind as yields around the world have shot up as well, according to Goldberg.

“It’s really this move higher in global interest rates that’s got a lot of investors worried, because, for the longest time after 2008, the US was the only game in town in terms of higher yield,” he told Insider. “Europe was at negative interest rates, Japan was at negative interest rates. A lot of that’s over.”

In fact, China and Japan loom as prime near-term disruptors, as both countries hold the most US debt globally.

The Treasury advisory group also flagged the risk that strength in the US dollar could be incentivizing foreign central banks to shed Treasury holdings to prop up their respective currencies.

In Japan, that’s as authorities are looking to end ultra-loose monetary policy, a shift that could force investors to reposition out of Treasurys and into Japanese bonds.

Likewise, the downward spiral in the Chinese yuan may push Beijing to unload more Treasurys. Although there’s some debate over how much China has actually sold or simply moved to other accounts, the mere risk of Beijing and Tokyo selling is serious.

“It’s more so the threat of them selling more assets that’s, I think, more destabilizing for markets,” Goldberg said.

Read the original article on Business Insider


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