Foreign
buying of U.S. bonds more talk than reality
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[March 26, 2015]
By Richard Leong
NEW YORK (Reuters) - The advantage of
higher yields in the United States has not prompted foreign buying as
investors had expected, and central banks have instead dumped Treasuries
in recent months.
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Foreign central banks reduced their holdings of U.S. Treasuries last
week to $2.900 trillion, the lowest in a year, according to the U.S.
Federal Reserve. Thursday will bring new weekly data on this figure,
and signals point to flows continuing toward Europe in both equity
and fixed-income.
The shift in money out of U.S. assets is unexpected, given that the
dollar recently hit a 12-year high and U.S. yields are much higher
than Europe's. Analysts believe overseas central banks have spent
dollar reserves to defend currency pegs or to stem further
depreciation against the greenback.
Overseas central banks sold Treasuries for a third consecutive month
in January, and have not ratcheted up their bidding for Treasuries
at auctions, Treasury Department data shows.
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Some foreign fund managers have decided to chase higher returns in
the European stock market rather than piling cash into Treasuries.
"While we do see some foreign purchases of U.S. bonds, a large part
of the money is being cycled into equities," said Kathy Lien,
managing director at BK Asset Management in New York.
European shares are up 17 percent so far in 2015, as the European
Central Bank's 1.1 trillion-euro quantitative easing has boosted
risk-taking. Some overseas investors might be hanging on to their
European government bonds in hopes of profiting from the QE program,
investors said.
This reduces the effectiveness of QE in weakening the euro, which
would help regional exporters.
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"The challenge for an economy with a current account surplus is that
recycling is required to keep the currency down. And with equity
inflows outpacing debt outflows, this recycling doesn't seem to be
happening," Citi analysts wrote in a research note on Tuesday.
About 50 billion euros went into European equities in January, while
roughly 20 billion euros left European debt, according to Citi
analysts.
BK's Lien said there is still a lot of foreign cash sitting on the
sidelines.
"We need to see a stronger message from the Federal Reserve that
they are ready to raise interest rates so we would see yields that
would inspire a more aggressive inflow. That may not happen until
this summer," Lien said.
(Reporting by Richard Leong)
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