When former Federal Reserve chairman Ben Bernanke first
hinted at a possible tapering of bond purchases nearly a year
ago, he triggered a rout in U.S. Treasuries that rocked
financial markets around the world. Today the Fed is actually
reducing its purchases of Treasuries, but many foreign central
banks including some in key emerging markets are
In 2013 foreign investors, including central banks and
private investors, bought only $228.2 billion of Treasuries,
increasing their holdings by 4 percent, according to numbers
from Bloomberg based on Treasury International Capital (TIC)
data. It was the lowest amount of foreign Treasury purchases
since 2006. But in the first two months of this year,
foreigners purchased $92.2 billion of Treasuries, more than a
third of last years total, lifting their holdings by 1.6
percent in the process, according to Treasury Department
Last year the main event was the talk about the
Federal Reserve [tapering its quantitative easing] that
generated a lot of volatility, says
Jens Nordvig, head of U.S. fixed-income research and global
head of foreign exchange strategy for Nomura in New York.
Foreigners were selling bonds for a few months.
Emerging-markets central banks cut their Treasury buying as
their accumulation of dollar reserves slowed last year. This
too was related to the chatter over tapering. That talk
depressed foreign investment in emerging markets, which meant
less upward pressure on those local currencies, which in turn
meant less need for emerging-markets central banks to sell
their currencies for dollars.
Normally the big currency accumulation in emerging
markets came from trying to smooth the appreciation in their
currencies when money was flowing in by intervening in the
currency market, says David Gilmore, a partner and
economist at Foreign Exchange Analytics, a currency analysis
service in Essex, Connecticut. Asian central banks had been the
most active on this front, but central banks in Latin America
did this too, he says.
From May onward, you didnt have an
emerging-markets inflow, says Priya Misra, head of U.S.
rates strategy research at Bank of America Merrill Lynch in New
York. Another factor weighing on foreign Treasury purchases
last year was the winding down of the European financial
crisis, which led foreigners to move into European debt instead
of Treasuries, she says. Those moves reversed some of the flows
of 2010-11, when the eruption of the European debt crisis
triggered a flight to safety in Treasuries. Finally, the
reduction in the U.S. budget deficit meant that the government
was issuing fewer Treasuries, which also curbed foreign demand,
Nordvig says. The deficit shrank to $680 billion in the fiscal
year that ended September 30, down from $1.1 trillion in the
Gilmore believes the deficit reduction will ultimately be
positive for Treasuries, as it could help bolster foreign
confidence in U.S. finances.
China is the largest foreign holder of Treasuries, with
$1.27 trillion as of February, according to Treasury Department
statistics. Its Treasury purchases have slowed to 3.1 percent a
year since 2010, down from a 34 percent pace during the
previous ten years, according to Bloomberg numbers based on TIC
data. Nordvig says that the slowdown reflects Chinas
downward-trending current-account surplus, which fell to 2
percent of gross domestic product in 2013 from 6 percent in
2009. Japan is the second-biggest foreign holder of Treasuries,
with $1.21 trillion as of February. In the past two years, it
added the least amount of Treasuries on a percentage basis
since 2007, according to TIC-data-based Bloomberg figures.
Japan historically buys large amounts of Treasuries when the
Bank of Japan intervenes to push down the yen, Nordvig says.
But the currency fell on its own last year, so there was no
International buyers played a role but not a decisive
one in the jump of Treasury yields last year.
Foreigners exacerbated the rate rise, but the comments
from Bernanke are what really did it, Misra says. As for
the rise in international Treasury purchases during the first
two months of 2014, foreign investors have finally
digested the news that the Fed has normalized policy,
Nordvig says. The yield curve is sitting at higher levels
[than before the tapering talk]. Thats attractive for
European and Japanese investors, where yields are very
China increased its Treasury holdings by $2.9 billion in
January and February, according to the Treasury Department. But
that may understate its buying. If Chinas central bank
purchases Treasuries through foreign banks, the Treasury
attributes much of those purchases to foreign banks. And if the
Peoples Bank of China holds its Treasuries at a foreign
bank, again, the holdings often get attributed to that bank.
Nordvig estimates that Chinas central bank bought $108
billion in an effort to depress the yuan in the first quarter.
And some of those dollars found their way into Treasuries.
Japan acquired $28 billion of Treasuries in the first two
months of the year. Life insurance and pension funds in Japan
have been buying Treasuries amid encouragement from the
The overall foreign buying has helped keep Treasury yields
down this year, experts say. There has been a broad-based
increase in demand for Treasuries, Nordvig says.
Foreign demand is part of that. He says foreigners
could continue to increase their Treasury purchases. I
think there will be very steady demand from Japanese
investors, he says. Thats a multiyear trend.
And with low yields in the euro zone, [even in] Italy and
Spain, U.S. interest rates will look more and more attractive
to foreign investors.
But Gilmore finds it worrisome that the massive expansion of
central bank currency reserves has created a vast pool of
capital that can run into and out of asset markets, such as
Treasuries. When you have money washing in financial
assets, theres a much greater propensity for asset
bubbles, he says. It facilitates a casino element
of modern finance, creating financial instruments for people to
express a bet, which may have nothing to do with real
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