(Repeat the previous story without modifying the text. The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are his own)
LONDON, June 16 (Reuters) – Who or what is holding back U.S. government lending rates has become one of the big financial issues of the year – at least for those who think the The Fed’s current bond purchase is not a sufficient explanation.
The puzzling decline in Treasury yields around second-quarter inflation fears points to several culprits – the Federal Reserve’s shrewd communications about “transient” price pressures, leaks due to a temporary flood of liquidity on money markets, off-set speculators or even distorted debt selling dynamics.
Either way, 10-year Treasury lending rates are mid-year 25 basis points below where they started the quarter, even though annual inflation readings are below. The United States surpassed forecasts in April and May to reach their highest level in almost 30 years at 3.8%.
The ten-year US inflation expectations embedded in the inflation-protected bond market are, at 2.38%, almost exactly where they were at the end of March.
All tariffed and temporary? Stable while she goes to the Fed? Is there no alternative?
Well, maybe; probably yes; and probably. This is what bond fund managers concede.
But even so, it bothers many investors looking for a better fundamental explanation.
Olivier Marciot, portfolio manager at Unigestion, based in Switzerland, believes that estimates of growth, inflation and term premiums in the United States taking into account other uncertainties over time place âfair valueâ for 10-year Treasury yields up to 3.6%, more than a percentage point above the current level. levels.
“Yields only obey central banks,” he said, blaming the Fed.
With its $ 80 billion a month treasury purchases likely to persist at least this year – and with two-thirds of global fund managers polled by Bank of America already expecting a signal of decline by September – you can see why it’s not a terribly successful battle for speculators to fight for now.
The BoA survey also had âShort US Treasuriesâ as the fifth most congested trade on the planet.
That said, JPMorgan categorically rejects the counterintuitive price action and urged clients this week, “Don’t read too much into this month’s bond rally.”
He felt that it was skewed by investors sensitive to volatility and speculative positioning, and offered opportunities to reduce âdurationâ in core markets.
In what he calls the “surprising second wave of global liquidity,” Citi strategist Matt King has suspected for months some suppression of returns of more than $ 1,000 billion from the extraordinary 1,600 general account. billion dollars from treasury to the Fed between the federal debt ceiling in January and August. deadline.
This drop in the TGA flooded the money markets with US bank reserves, deprived them of further Treasury bill sales, and brought short rates to zero in the process – pushing money, many suspect, at least further. on the curve.
But that will become a problem in the second half of the year, King believes.
But another finger repeatedly points to foreign demand for one of the few available “safe” public assets not already clawed back by central banks from the major G4 reserve currencies – the dollar, euro, Japanese yen and pound sterling.
Currency hedge fund manager Stephen Jen at EurizonSLJ says the scale of bond purchases by the European Central Bank, Bank of Japan and Bank of England relative to underlying budget deficits – 161%, 110 % and 129% respectively – means that the three actually take more bonds out of the market than their governments sell.
This reduces the amounts available to private investors needing safe assets in the major reserve currencies. But, because the Fed still only buys 37% of US deficits, the share of Treasuries in a âfree floatâ notional global bond index reaches 60% – more than double that of 10 years ago .
The confluence of last week’s T-bill rally with the ECB doubling on a faster pace in its pandemic-linked bond purchases – as well as strong foreign demand for 30-year T-bills in the Thursday’s auction – go in that direction.
Dollar hedging costs for euro and yen based investors are also attractive right now – adding to the appeal of nominal 10-year Treasury yield premiums to Japanese and German equivalents between 145 and 175 basis points.
Jen says it’s hard to attribute all of this to last week’s price movements per se, but structurally there was a real problem here.
âThe whole world is running out of sovereign bonds to buy, especially sovereign bonds issued by a country issuing reserve currencies that pay significant interest rates,â he said.
A US Federal Reserve document estimated last year that the global build-up of international reserves in safe sovereign assets since the 1990s – the so-called “global savings glut” – has reduced the economy. net supply of these assets and cut neutral rates by up to 50 basis points. .
Others recognize but play down the foreign spillover into treasury bills as a dominant factor.
Mike Contopoulos, director of fixed income at Richard Bernstein Advisors, told the Reuters Global Markets Forum this week that there is “a grain of truth” to strong foreign demand and the attraction covered by forex – but he believes that one cannot generally count on the foreign time base, especially if the Fed were to decline.
On this point, Treasury data shows that – aside from the Fed – it is the Americans who have actually increased their holdings of Treasuries in recent years – with pension funds in the foreground. At the end of the first quarter, some 44% of federal debt was held by domestic private investors – up 8 percentage points in just 5 years.
And like many markets, passive investing is also an important driver. Lipper data shows that exchange-traded funds registered in the United States in all taxable bonds more than doubled assets under management over the same five-year period, with Treasury ETFs alone holding nearly a quarter of a trillion dollars.
by Mike Dolan, Twitter: @reutersMikeD; Supplementary Data Report by Aaron Jude Saldana; Editing by Jan Harvey