Speculation that China could be looking to reduce or even halt its U.S. Treasury purchases going forward has flooded media outlets recently and spooked investors. Following the news Treasury yields were sent to more than 10-month highs likely on concerns that significant changes to China’s Treasury holdings could trigger a sell-off in both bond and equity markets.
A strong 10-year Treasury auction on Wednesday countered that narrative, however, and helped to stem the losses tied to the China news. In fact, the auction saw its strongest overall demand since June 2016. Further allaying investors’ concerns was the degree of participation of indirect bidders since the group, represented by financial institutions like foreign central banks and viewed as a proxy for foreign demand, accounted for 71.4% of the bond purchases, the highest level since August 2016.
*Takedown refers to amount purchased
While foreign demand for U.S. debt remains robust, we are monitoring the potential impact of increasing hedging costs, as well shifts in foreign central banks’ monetary policy. Why are these important? Both have the potential to hamper demand for Treasuries and push U.S. yields up. Foreign investors usually hedge their currency exposure when investing in Treasuries; and increases in hedging costs, as we’ve recently seen for Japanese investors, can limit demand despite dramatic yield advantages between the U.S. and foreign government bonds.
Global central bank activity is another important factor impacting demand for Treasuries because, if other central banks become more aggressive in normalizing their monetary policy (i.e., raising rates), yields abroad could rise, making the debt more attractive to investors who may otherwise have purchased U.S. debt. While we don’t anticipate these factors causing foreign demand to fall precipitously, we continue to monitor these and other gauges of demand.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor