Foreign Demand Soars for U.S. Treasurys, the ‘One-Eyed King’

Investors across the globe are seeking better returns from the negative yields and record-low rates found in Japan and Europe

By Min Zeng


The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe.

On Thursday, an auction of 30-year Treasury debt attracted some of the highest demand ever from overseas buyers, at a yield of 2.475%, the lowest for the 30-year bond since January 2015.

It was the second sale in as many days to draw strong foreign interest. On Wednesday, the Treasury sold $20 billion of 10-year notes with a record share going to buyers outside the U.S., offering a yield of 1.702%, down sharply from the 2.461% investors got a year ago.

The European Central Bank’s bond-buying program and a negative-rate environment in Japan are keeping U.S. yields down even as riskier assets like stocks and oil have risen. These forces also show how global flows of money are making it difficult for the Federal Reserve to control the path of U.S. interest rates.

Yields on 10-year government bonds in Germany, the U.K., Switzerland and Australia all closed at record lows Thursday. The yield on the German bond is just four hundredths of a percentage point away from turning negative, which would mean buyers would get back less than they paid if they held the bonds to maturity.

U.S. Treasurys are the “one-eyed king,’’ said David Keeble, global head of interest-rates strategy at Crédit Agricole SA CRARY -3.47 % . “There is just a shortage of yield on the planet.’’

The 30-year German government bond yielded 0.63% on Thursday. The bond of that term in Japan was even stingier, at 0.30%. In Switzerland, the 30-year bond yielded 0.07%. Bond yields move inversely to prices.

The 10-year Japanese and Swiss bonds both yielded below zero.

One proxy measure of demand from foreign central banks and private-sector buyers jumped to 64.9% in Thursday’s auction of 30-year Treasury bonds, up from an average of 60.1% in the past eight sales.

It was the fourth-highest level of demand from foreign investors for a 30-year bond on record.

In the 10-year auction, the proxy measure for foreign demand reached 73.6%, topping the 73.5% record set a month earlier.

Thirty-year bonds typically attract a specialized audience, largely pension funds and other investors trying to buy assets to match long-term liabilities. There are few viable alternatives for such buyers around the world.

The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise.

The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates.

And with yields so low, buyers aren’t getting much income to compensate for that risk.

Bill Gross of Janus Capital Group Inc. said in a comment on the firm’s Twitter feed that global yields were the lowest “in 500 years of recorded history” and warned that the large mass of negative-yielding bonds around the world is “a supernova that will explode one day.”

Money managers said they recognize the dangers. But with ECB and Bank of Japan continuing to buy government bonds, the competition among private-sector investors to obtain these debt instruments may get more intense and send yields lower still.

Among buyers from this week’s Treasury auctions was Jason Evans, co-founder of hedge fund NineAlpha Capital LP, who is former head of U.S. government bond trading at Deutsche Bank AG DB -1.99 % and Goldman Sachs Group Inc. GS -0.95 % Mr. Evans said this week’s moves suggest bond yields could fall further, meaning investors’ options could become even less appealing.

“The world is awash with negative-yielding bonds,’’ said Mr. Evans. “The Treasury bond market is the tallest pygmy. That is the world we are living in now.’’

He said the U.S. 10-year yield could fall to 1.5% in coming months. On Thursday, the 10-year yield dropped to 1.678%, the lowest since its 2016 nadir of 1.642% on Feb. 11.

Back then, the Dow Jones Industrial Average closed at 15660.18. On Thursday, the blue-chip index finished at 17985.19, about 325 points from its all-time high.

Demand for Treasurys often reflects a flight from risk, but it now appears to be motivated by a hunt for yield, said Michael Purves, chief global strategist at Weeden & Co.

“As foreign bonds get bid and those yields go down, that falls right into our laps over here in Treasurys,” said Mr. Purves.

Analysts said central banks’ moves to stimulate the economy have distorted market signals and made it difficult for investors to assess the fair value for bonds.

Lynn Chen, senior portfolio manager at Aberdeen Asset Management, which had $420.9 billion of assets under management at the end of March, said the simultaneous strengthening of safe-haven bonds and stocks might not be sustainable. She said Treasury bond yields may be the one to give.

She said they could rise later this year. The U.S. economy has been resilient, worries over a sharp slowdown in China have eased and oil prices have risen sharply from a 2016 low hit in February, said Ms. Chen.

Still, some investors have to make do with skinny government bond yields, because they have the mandate to invest in high-grade sovereign debt.

“The global demand for fixed-income products, seemingly at any price, remains profound around the world,’’ said Thomas Simons, a money market economist at Jefferies in New York.

How Fascism Comes to America

by Doug Casey


I think there are really only two good reasons for having a significant amount of money: To maintain a high standard of living and to ensure your personal freedom. There are other, lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can't think of something better to do with your time.

But I'll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you'd like – and when, how, and with whom you prefer to do it. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today's world and will wind up savaging billions in the years to come.

As you know, I believe we're well into what I call The Greater Depression. A lot of people believe we're in a recovery now; I think, from a long-term point of view, that is total nonsense. We're just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while – perhaps for many years, depending on how stupidly the government acts.

Real Reasons for Optimism

There are reasons for optimism, of course, and at least two of them make sense.

The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprises. But what if outside forces make that impossible, or at least much harder than it should be?

The second reason for optimism is the development of technology – which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn't generated by individuals and businesses to fund further technological advances?

There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated – perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology – it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way – the classical world, followed by the Dark Ages, followed by the medieval world. Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish, or short. I'm reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology.

Real Reasons for Pessimism

Those are the two mainsprings of human progress: capital accumulation and technology.

Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that's become so complex that it's too difficult for most people to sort out cause and effect. Furthermore, most people in the OECD world have become so accustomed to good times, since the end of WW2, that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I'm very optimistic, progress – certainly over the near term – isn't guaranteed.

These are the main reasons why the standard of living has been artificially high in the advanced world, but don't confuse them with the two reasons for long-term prosperity.

The first is debt. There's nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it's self-liquidating; and most of it would necessarily be short term.

But most of the scores of trillions of debt in the world today are for consumption, not production.

And the debt is not only not self-liquidating, it's compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt, consumer debt, and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future.

The entire world has basically overlooked this, along with most other tenets of sound economics.

The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they're indirect and delayed. If the central bank deposited $10,000 in everyone's bank account next Monday, everyone would think they were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We've had a number of inflationary cycles since the end of the last depression in 1948. I believe we're now at the end of what might be called a super-cycle, resulting in a super-depression.

The third is the export of dollars. This is unique to the U.S. and is the reason the depression in the U.S. will in some ways be worse than most other places. Since the early '70s, the dollar has been used the way gold once was – it's the world's currency. The problem is that the U.S. has exported perhaps $10 trillion – but nobody knows – in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy.

But at some point quite soon, dollars won't be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the U.S., to be traded for titles to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It's actually a game with no winner.

What's Next

These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated.

The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they've also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they'll redouble their efforts in the fiscal and monetary areas I've described above, albeit with increasingly disastrous results.

They'll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they'll blame things on foreigners. Fortunately (the U.S. will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious – but distracting – new wars.

It's most unfortunate, but the U.S. and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They'll all be perfectly fascist – private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it's totally the whim of the people in control, and they'll prove ever more ruthless.

So where does that leave us, as far as accumulating more wealth than the average guy is concerned?

I'd say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you're an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you'll take action.

There's much, much more to be said on all this. I've said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis.

Essentially, act now, because the world's combined economic, financial, political, social, and military situation is as good as it will be for many years… and a lot better than it has any right to be.

What to Do?

No new advice here, at least as far as veteran readers are concerned. But my suspicion is that very few of you have acted, even if you understand why you should act. Peer pressure (I'm confident that you have few, if any, friends, relatives, or associates who think along these lines) and inertia are powerful forces.

That said, you should do the following:

1. Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren't as easy to do as they used to be.

But they'll likely be much less easy in the future.

2. Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.

3. Buy some nice foreign real estate, ideally in a place where you wouldn't mind spending some time.

4. Work on getting official residency in another country, as well as a second citizenship/passport. There's every advantage to doing so, and no disadvantages. That's true of all these things.

One more thing: Don't worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we've seen it in big countries such as Russia, Germany, and China.

And in scores of smaller ones – the list is too long to recount here. The good news is that things almost always get better, eventually.

Four Risks That Could Push the U.S. Economy Into Recession

By Josh Zumbrun 

  
Many economists believe the U.S. faces a non-negligible risk of entering a recession within the next year. Asked to rank the probability of being in recession at some point over the next 12 months, respondents to The Wall Street Journal’s monthly survey of economists, on average, put the odds at 21%. That’s about double what they were a year ago. Not high enough to panic, but high enough to pay attention.

We asked the group of about 70 business, financial and academic economists to list the biggest risk factors they believe could tip the U.S. into recession. Most of their responses fall into just four distinct categories of worry: risk from China, falling levels of business investment, U.S. political uncertainty and concern that slower job growth and economic growth leave the U.S. at risk of stalling out.

1. China

The single risk getting the most attention in the U.S. economy is not even part of the U.S. Just over 40% of the respondents to the WSJ survey listed the potential fallout from China as the biggest risk.

“China is building a house of cards, and the risk is that it collapses sooner as opposed to later,” said Diane Swonk of consultancy DS Economics.

The world’s second-largest economy is seen as especially dangerous because it has relied heavily on debt to fund infrastructure and economic expansion. If all that debt can’t be paid back, it could lead to a full-blown Chinese financial crisis in worst-case scenarios, or to a Chinese recession in less-severe-but-still-troubling scenarios. China is a notoriously hard economy to monitor, and few are confident about what exactly will transpire. But a collapse in China could spark turmoil in financial markets, a slowdown in global trade, hurt many  U.S. exporters and cause commodity prices to tumble even further.

2. Business investment

Many economists have an increasingly nervous eye on the levels of U.S. business investment. Though it gets much less attention than the monthly jobs report, one report worth watching is the Commerce Department’s measures of spending on capital goods. The report shows companies are spending less on things like machines, computers and raw materials powering their businesses. As of April, orders for nondefense capital goods excluding aircraft — a key gauge of overall business investment — fell by 0.8% in April and has declined nearly 12% since September 2014.

“Poor revenues and declining earnings causing cutbacks in capital spending and hiring is the risk,” said Allen Sinai, chief economist at Decision Economics Inc.

Companies face a range of pressures. Exporters and manufacturers are contending with a weak global economy and risks from China. U.S. oil companies have, of course, been battered by low oil prices. And firms are facing a highly uncertain environment, driven in part by the third-largest risk: U.S. politics.

3. U.S. politics

Every presidential election introduces an element of uncertainty into the U.S. economy, but this election has been especially challenging because of stark differences between candidates Hillary Clinton and Donald Trump, and in the case of Mr. Trump, a great deal of uncertainty about the policies he would pursue if elected. About 15% mentioned this politically induced uncertainty as a large risk.

Leave aside your personal politics for a moment, and consider Mr. Trump’s statements about the U.S. debt. He has said he can eliminate $19 trillion of debt in eight years while simultaneously proposing large tax cuts, not touch major entitlement programs and increase military spending. He’s also suggested he might renegotiate the debt, but also said he would merely seek to refinance it. Now, with all that in mind, if he’s elected what do you think the yield on the 10-year-Treasury will be next year?

“The chance of a recession depends increasingly on the comfort level Americans have on who sits in the White House next year,” said Bernard Baumohl, chief economist of the Economic Outlook Group.

4. Stall speed

The final concern, mentioned by about 15%, is the risk that with the economy growing more slowly and adding fewer jobs, the U.S. is simply more vulnerable to tumbling into recession from small shocks. Economists sometimes call this “stall speed,” a term borrowed from aviation, where if a plane is traveling too slowly it can easily be knocked off course by things that would be a minor squall at higher speeds.

“The slowdown that we’ve talked about for the last year raises the risks,” said Thomas Kevin Swift, chief economist at the American Chemistry Council, a trade group.

The economy grew just 0.8% in the first quarter of the year, according to the Commerce Department. The most recent jobs report was an “unqualified dud.” If the U.S.  economy is simply running out of momentum, it wouldn’t necessarily take much from China, or business investment or U.S. politics or any of a number of other factors, to be flirting dangerously with recession. (Here’s a detailed case on how this vulnerability might play out.)

A few notable things are absent from the list of economists’ worries. While people are keeping a careful eye on the United Kingdom’s vote later this month on whether to leave the European Union, few economists see the so-called “Brexit” as a major source of U.S. economic risk. Only three of the survey’s respondents mentioned it as a key risk. Right now, with the Fed likely on hold in June, few economists are worried the Federal Reserve will knock the economy into recession.

The economy could be tipped into recession by a combination of these factors, or by something else entirely. Most economists still think the U.S. will probably avoid recession entirely for now, but these remain four key risks to watch.


'Out Is Out'

Schäuble Warns of Single Market Access in Event of Brexit
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In an interview with SPIEGEL, German Finance Minister Wolfgang Schäuble warns of the consequences if the British vote in favor of Brexit. Even if a slim majority votes against it, he says, the EU cannot continue with "business as usual."

How would the EU respond if the British voted to leave theEuropean Union? German Finance Minister Wolfgang Schäuble has stated that he rejects a further deepening of integration in Europe. "In response to Brexit, we couldn't simply call for more integration," the politician, a member of Chancellor Angela Merkel's conservative Christian Democratic Union, told SPIEGEL in an interview. "That would be crude, many would rightfully wonder whether we politicians still hadn't understood." Even in the event that only a small majority of British voters reject a withdrawal, "we would have to see it as a wakeup call and a warning not to continue with business as usual," Schäuble said.

The British will head to the polls on June 23 to vote on whether their country will remain a member of the EU. Opinion polls currently show a neck-and-neck race, with the outcome of the vote still completely open.

In the interview, to be released on Saturday in the next issue of SPIEGEL, which includes 23 pages published in English, the finance minister warns that a British withdrawal from the EU could also negatively impact Britain's partner countries. "But my counterparts in the eurozone and I will do everything possible to contain these consequences. We are preparing for all possible scenarios to limit the risks."

Schäuble warned that a copycat effect would also be possible if Britain leaves the EU, and that other countries might follow. "That cannot be ruled out," he said. "How, for example, would the Netherlands react, as a country that has traditionally had very close ties to Britain?" But the German finance minister said he did not fear the EU would face an existential crisis in the wake of a possible Brexit. "Europe will also work without Britain if necessary."

The minister also warned the British that they may suffer from the economic aftermath of an EU exit.

The country is economically so tightly interwoven with its EU partners that "it would be a miracle if there were no economic drawbacks following a British withdrawal."

Schäuble also ruled out the possibility Britain could again enjoy advantages of the single market, similar to the ways non-EU members Switzerland and Norway do, after leaving the EU. "It would require the country to abide by the rules of a club from which it currently wants to withdraw." Brexit, he said, would be a decision against the single market. "In is in. Out is out," Schäuble said.