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.
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.