US Bond ‘Death Spiral’ Risk Brushed Aside by Foreign Funds

MT HANNACH
9 Min Read
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(Bloomberg) — Whether you’re talking to Europe’s biggest money manager, Australia’s giant pension funds, or a cash-rich Japanese insurer, you’ll hear a resounding message when it comes to U.S. Treasuries: they are still difficult to obtain. beat.

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Four months after new Vice Chairman JD Vance said he feared Treasuries could face a possible “death spiral” if bond vigilantes sought to drive up yields, companies like Legal & General Investment Management and Amundi SA say they are ready to grant the advantage to the new administration. doubt.

There are many reasons why global funds are buying, even though Treasuries are mired in a historic bear market. The securities offer a huge yield premium over bonds in countries like Japan and Taiwan, while Australia’s fast-growing superannuation sector adds Treasuries every month due to the depth and liquidity of the market . The United States also appears to be a safer bet than some European sovereign markets which are themselves struggling with fiscal problems.

Investors were also reassured by Trump’s nomination of hedge fund manager Scott Bessent as Treasury secretary, tasked with overseeing government debt sales. Bessent, whose Senate confirmation hearing is scheduled for Thursday, aims to reduce the deficit as a percentage of gross domestic product through tax cuts, spending controls, deregulation and cheap energy.

“When it comes to the risk of a ‘death spiral,’ any bond market can find itself caught in a mutually reinforcing cycle of higher yields and higher debt projections,” said Chris Jeffery, head of macro strategy and asset management at Legal & General Investment, the British company. the largest asset manager. But “the new Treasury secretary has talked about aiming for a 3% deficit in 2028. Bond investors have no reason to go on strike if the federal government adopts such aspirations.”

The position of foreign investors in Treasury bonds is more important than ever. Foreign funds held $7.33 trillion in long-term U.S. debt at the end of October, about a third of the outstanding amount, and just below the record $7.43 trillion they held in September, according to the latest data of the American government.

At the heart of the debate over whether to continue buying Treasuries is the largest U.S. federal deficit outside of extreme periods such as the pandemic and global financial crisis. There are a number of signs that investors are getting nervous. Benchmark US 10-year yields have jumped more than a percentage point from September’s low and are once again threatening to surpass the key psychological level of 5%.

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