The U.S. Treasury market has been propped up by willing foreign buyers, but Asian demand has diminished, potentially pushing up yields and pressuring Treasuries and related exchange traded funds.
While rising interest rates may be a primary driver to the 3.5% decline in the iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) and 9.7% drop in the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) year-to-date, the diminished demand from foreign investors may further weaken the Treasury bond outlook.
As the Treasury Department preps to sell $1.3 trillion in new debt for the upcoming fiscal year, the government may find less willing buyers. Foreigners increased holdings in Treasuries by $78 billion in the first eight months of the year, or just over half of what they bought in the same period last year, the Wall Street Journal reports.
Buyers among Asian economies, including South Korea, Singapore, Thailand and Taiwan, have particularly fallen off. The emerging Asian economies are facing tagnant trade flows and strong reserve balances have diminished their need for U.S. government debt.
The reduced demand in emerging markets also reflects their maturing domestic economies where investors have a greater choice of domestic investments to park their money into.
“They don’t need to build any more buffers,” Tim Alt, who manages currencies and bonds with Aviva Investors, told the WSJ. They “have an alternative where you don’t have to recycle everything into U.S. Treasurys.”
Meanwhile, the drop-off in demand among investors European and Japanese buyers is attributed to the increased cost of protecting themselves from the currency risks of buying dollar-denominated debt.
Additionally, Torsten Sløk, chief international economist at Deutsche Bank Securities, argued that the lack of demand is more likely an indirect byproduct of U.S. trade tensions with China this year. The weakened Chinese yuan currency also dragged down the currencies of many of its trading partners and neighbors.
Sløk believed that the depreciating Asian emerging countries’ currencies have helped their export industries but also cut back the need for them to buy Treasuries, which has been a popular way for their central banks to depreciate their currencies against the USD.
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