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Cheap dollars attract foreign investors to government bonds

As pension funds boost holdings, the cheapest dollar in recent years has spurred an increase in foreign investment in US Treasuries. And even as the economy strengthens, a recovery in demand can weigh on Treasury rates.

The WSJ dollar index, which measures the greenback against a basket of currencies, has fallen 2.9% by this quarter, approaching its lowest level in about five months. According to Deutsche Bank’s analysis, the forward rate dollar hedge price was also the cheapest and staying close in at least six years last week.

Laurent Crosnier, Chief Investment Officer of Amundi’s London branch, Europe’s largest asset management company, said: Positive yields and low hedging costs “make the US Treasury more attractive than other Treasury.”

Benchmark 10-year Treasury yields fell below 1.5% earlier this week and ended Thursday at 1.458%. This is the lowest level since March 2nd. When the yield goes down, the price goes up.

Government bonds are popular during periods of low economic performance due to security and liquidity. Recovery from a pandemic is widely expected to result in a reduction in their holdings as fund managers position their portfolios for better times and less uncertainty. Investors are widely expecting increased inflation due to a combination of stagnant demand, supply constraints and stimulating spending. This is also considered negative for traditional bonds, where fixed cash flow loses purchasing power as prices rise.

Nevertheless, recent Treasury bond auctions have seen increasing demand from foreign investors. The five-year bond sale on May 26 was the most bid by more than 64% of foreign investors since August. The seven-year publication of the same week was the highest since January. Major foreign investors increased their holdings of long-maturity US Treasuries in March, according to the latest US Treasury data.

According to analysts, the weak dollar is associated with a high level of liquidity in the market due to a combination of Federal Reserve stimulus and huge fiscal spending from the White House.

According to the Federal Reserve Bank of St. Louis, cash holdings surged during the blockade of Covid-19, reaching a record $ 17.1 trillion in US commercial bank deposits. According to the Investment Company Institute, money market funds have total assets of $ 4.6 trillion, close to record levels.

Yields on US money markets are under pressure from excess liquidity, with some pushing towards zero.

The forward rate, which is used to fix the exchange rate at some point in the future and mitigate the risk of currency fluctuations, is priced based on the difference between the money market rate and the yields of domestic short-term debt in the two currencies. market. The smaller the gap, the cheaper the trade. This happened when US interest rates fell.

Saxo Bank’s fixed income strategist, Artea Spinozzi, said:

This is higher than all European government bonds with the same maturity. Italy’s 10-year bond yield was 0.755% on Thursday. Japan’s equivalent bonds resulted in 0.659%.

Benchmark 10-year Treasury yields fell to their lowest levels since March 2 earlier this week.


Photo:

The Wall Street Journal Tin Shen

Indeed, many analysts expect Treasury yields to rise as US economic growth and inflation recover. According to FactSet data, a median of 47 predicts that the benchmark 10-year Treasury yield will reach 1.90% by the end of the year.

Ralph Prusser, a fixed income strategist at Bank of America, said:..

“I think the dollar rate will sell slower and slower when it reaches 2% in 10 years. We expect this to begin with the flow of European and Japanese investors,” he said. Told.

Another source of funding for the Treasury is the pension fund. The strong recovery of risky assets such as stocks in recent months has helped many funds fill the gap between asset value and liabilities, allowing cash to be transferred to safer assets such as bonds. It’s done.

According to Bank of America analysts, US pension funds shifted nearly $ 90 billion from equities to fixed income in the first quarter of this year, of which $ 41 billion was invested in the Ministry of Finance.

While these flows helped keep yields down, JP Morgan Asset Management’s global market strategist Mike Bell expects yields to rise to around 2% over the next 12 months over the next 12 months. The level said it would attract even more investment flows. ..

“The rise in yields from there will be much slower and the Treasury will be much more attractive,” he said.

Write to Anna Hirtenstein (anna.hirtenstein@wsj.com)

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Cheap dollars attract foreign investors to government bonds

Source link Cheap dollars attract foreign investors to government bonds

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