Foreign buyers are just not as enamored with U.S. Treasuries as they use to be. The diminished demand could push bond yields higher and weigh on Treasury bonds, along with related exchange traded funds.
The group of so-called indirect bidders, which includes both mutual funds and foreign investors, have been buying the smallest percentage of bonds they’ve bid for since 2011, reports Daniel Kruger for the Wall Street Journal.
Foreign investors hold about 43% of U.S. government debt, the lowest since November 2016. The foreign buyers group has steadily reduced their stake in U.S. debt from a peak of 55% during the financial crisis.
“We cannot exist at these growth rates with these deficit projections without foreign participation,” Andrea Dicenso, a portfolio manager and strategist at Loomis, Sayles & Co., told the WSJ.
The diminished demand among foreign investors also comes as yields on benchmark 10-year Treasuries hit 3% last week for the first time since 2014. Now, many investors and analysts anticipate yields to push even higher as the increase in U.S. borrowing due to tax cuts and higher spending expand the supply of debt outstanding.
Related: 6 Bond ETF Ideas to Hedge Against Rising Yields
Will China Dump Treasuries?
There has been been speculation that China, one of the largest holders of U.S. debt, could dump Treasuries, especially in response to escalating tensions between Washington D.C. and Beijing. The flood of new supply could exacerbate the markets as the U.S. is increasing new issue sales. Economists and other investors, though, contend that it would run counter to China’s own economic interest to adopt such a move.
The weakness in the U.S. dollar has also made it more difficult for some foreign buyers to invest into Treasuries since it made it more expensive to hedge currency risks. Some have opted to buy European or Asian government debt instead.
Related: Attractive Yield-Generating Emerging Market Bond ETFs
Traders who are wary of further declines in the Treasury market or higher yields ahead may also incorporate a small bearish or inverse bond ETF strategy to a diversified fixed-income portfolio to hedge the market risks.
For example, the ProShares Short 20+ Year Treasury (NYSEArca: TBF) takes the simple inverse or -100% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. Additionally, the Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) tracks the -3x or -300% daily performance of the NYSE 20 Year Plus Treasury Bond Index.
For more information on the fixed-income markets, visit our bond ETFs category.