Against the backdrop of escalating global geopolitical risks, the U.S. Treasury market is facing new challenges.
Against the backdrop of escalating global geopolitical risks, the U.S. Treasury bond market is facing new challenges. This week, the U.S. Department of the Treasury will auction 10-year and 30-year Treasury bonds, with market attention focused on whether overseas investor demand continues to weaken. Previous indications have shown a noticeable decline in foreign investors' interest in U.S. debt following the U.S. military action against Iran.
Although the 3-year Treasury bond auction conducted this Tuesday performed robustly, alleviating some market concerns about rising financing costs, investors remain cautious about demand for medium- to long-term bonds. Affected by a temporary ceasefire agreement, U.S. Treasury yields have recently retreated, but the expected yield on the 10-year Treasury bond may still be higher than the auction levels since July last year, reflecting that demand has not fully recovered.
Data from the U.S. Treasury shows that during multiple Treasury auctions held in the first half of March, the proportion allocated to foreign and international accounts significantly declined. The overseas allocation ratios for the 3-year and 10-year Treasury bonds dropped to their lowest levels since October last year, while the 30-year Treasury bond hit its lowest level since July last year.
Meanwhile, holdings of U.S. Treasuries by foreign official and international accounts custodied by the Federal Reserve have decreased by approximately $66 billion since the conflict began. This trend further reinforces the market's view of weakening overseas demand.
Analysts point out that surging oil prices could be one of the significant reasons. Countries such as Turkey, India, and Thailand, which are major global oil importers, may need to sell U.S. Treasuries to raise cash amid rising energy costs, thus exerting pressure on demand for U.S. Treasuries.
In addition to overseas factors, increased overall market volatility is another key reason for weak demand. Since March, driven by rising oil prices fueling inflation expectations, the U.S. Treasury market has suffered its largest decline in nearly a year, while market expectations of Fed rate cuts within the year have significantly cooled.
Institutional views suggest that in a high-volatility environment, not only overseas investors but virtually all types of investors tend to be cautious, resulting in generally poor auction subscription outcomes.
From a longer-term perspective, the share of overseas funds in the U.S. Treasury market has clearly declined. Data indicates that as of January this year, foreign investors held approximately $9.3 trillion worth of U.S. Treasuries, accounting for about 30% of the overall $31 trillion market; whereas in 2008, this proportion was as high as 56%.
Moreover, cross-border capital flow data also show that since the U.S. introduced tariff policies in April last year, disrupting global trade, foreign investors’ allocation to U.S. Treasuries has been on a continuous downtrend, particularly with noticeable reductions in holdings of short-term cash-equivalent securities.
However, there remains disagreement in the market over whether this trend constitutes a 'structural shift.' Some argue that this might simply be a short-term reaction to a high-inflation environment and U.S. policy uncertainty, rather than the beginning of a long-term decline in demand.
Notably, as yields retreated after hitting a阶段性 high at the end of March, market sentiment has somewhat recovered. Some institutions believe that the current interest rate level is already attractive, and with investors beginning to factor in both inflation and the risks of slowing economic growth simultaneously, this may help improve the performance of this month's treasury bond auctions.
Moreover, the relationship between oil prices and short-term interest rates is also evolving. The market no longer solely views rising oil prices as an inflationary pressure but is starting to focus on their potential inhibitory effect on economic growth.
Editor/KOKO