Foreign bond investors are expressing significant concerns over US deficits, according to insights from TD Securities analyst Gennadiy Goldberg. This comes amidst indications of a decline in demand for US Treasury bonds. Goldberg noted that the climbing yields globally could exert upward pressure on US rates to maintain competitiveness. He also highlighted the inability to control deficits, as they continue to grow exponentially, which is causing unease among foreign investors. Observers even warn of a potential default in the future due to government overspending, with Fitch Ratings having already downgraded the US credit rating.
Despite a recent retreat in US bond yields after reaching 17-year highs, risks in the bond market persist. Several auctions of longer-dated Treasurys have experienced lackluster demand, raising concerns. The upcoming 10-year and 30-year bond auctions hold significant importance as they serve as a crucial test for the market. Additionally, a recent report from a key advisory group to the Treasury Department indicates early signs of weakening demand, coinciding with an increase in supply.
The surge in global interest rates is a major source of worry for investors. Previously, the US provided higher yields compared to Europe and Japan, where interest rates were negative. However, this dynamic has shifted, with China and Japan holding the most significant amount of US debt. Moreover, the strength of the US dollar may incentivize foreign central banks to shed Treasury holdings in order to support their respective currencies. Japan, in particular, is looking to end its ultra-loose monetary policy, potentially triggering a repositioning of investments from Treasurys to Japanese bonds. Meanwhile, the devaluation of the Chinese yuan could lead China to sell off more Treasurys, posing a serious risk. Goldberg emphasizes that the threat of increased asset selling by China and Japan is more destabilizing for markets than the actual sales themselves.
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