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Cheap dollars attract foreign investors to the treasury.



Cheapest Dollar in Years Spurs Foreign Investment in US Treasury Bonds increase at the same time With that, pension funds are accelerating their holdings. And rising demand could affect Treasury interest rates even if the economy strengthens.

The WSJ dollar index, which measures the greenback against a basket of currencies, is down 2.9 percent in the quarter so far. and near its lowest level in five months. According to Deutsche Bank analysis, the price of the hedged dollar through FX forwards was the lowest in at least six years last week and remains about the same.

“If I were to buy the bond market This is the case with many investors. I will buy the US Treasury,” said Laurent Crosnier, chief investment officer at London-based Amundi, Europe̵

7;s largest asset manager. Positive returns and low hedging costs “This makes the US Treasury more attractive compared to other places.”

The 10-year government bond yield fell below 1.5% earlier this week, closing at 1.458% on Thursday. This was the lowest level since March 2. Prices rose as yields fell.

Government bonds are popular during economic downturns for security and liquidity. A recovery from the pandemic is expected to result in fund managers reducing their holdings. This is because portfolios are better positioned and less uncertain. Investors widely expected inflation to rise from pent-up demand. supply constraints and spending to stimulate the economy together This is seen as a negative for conventional bonds, where fixed cash flows lose purchasing power as prices go up.

However, the recent Treasury bond auction This has increased demand from foreign investors. The 5-year debt sale on May 26 received the most bids from foreign investors since August at more than 64%. The 7-year issuance in the same week was high. The best since January The latest data from the US Treasury Department It shows that major foreign investors have increased their holdings of US Treasury bonds. that lasted longer in March

The weaker dollar was linked to high liquidity in the market from the Federal Reserve’s stimulus package and massive fiscal spending from the White House. analyst said

Cash holdings skyrocket during COVID-19 lockdown Deposits at US commercial banks stood at a record $17.1 trillion. According to the Central Bank of St. Louis Assets in money market funds total $4.6 trillion, according to the Investment Company Institute, near record levels.

US money market yield under pressure from excess liquidity with some pointing to the center

A forward rate used to lock the exchange rate at a certain point in the future and reduce the risk of currency fluctuations. Pricing is based on money market rates and the difference between the returns on domestic short-term debt of the two currencies. The smaller the market gap, the smaller the yield. Trade is even cheaper—and that’s what happens when US rates go down.

Althea Spinozzi, fixed-income strategist at Saxo Bank, said, “If you use the US Treasury, it’s 10 years old and you hedge the next three months. The return you get will be about 0.9%”

This is higher than all European government bonds with the same maturity. Italian 10-year bond yields were 0.755% on Thursday. Japanese bond yielding 0.659%

10-year government bond yields fell earlier this week to their lowest since March 2.


Photo:

Ting Shen from The Wall Street Journal

Many analysts expect Treasury yields to skyrocket as U.S. economic growth and inflation rise. rose A median of 47 estimates that the 10-year government bond yield program will hit 1.90% by the end of the year, according to FactSet.

“That means if you trade that right now That second selloff could wash off your expected returns,” said Ralf Preusser, fixed income strategist at Bank of America..

“We think the dollar selloff will be slower and more gradual as we hit 2% over 10 years. That’s where we can expect this to start with a wave of European and Japanese investors. ” he said.

Another source of money flowing into the Ministry of Finance is the Pension Fund. The strong surge in riskier assets such as stocks in recent months has helped close a massive fund shortage between asset and liability values. This allows them to move cash to safer assets such as bonds.

Bank of America analysts said the US pension fund It shifted nearly $90 billion of out-of-stock capital and fixed income in the first quarter of this year, with $41 billion going into Treasurys.

These flows stifle yields, but Mike Bell, global market strategist at JP Morgan Asset Management, said he expects 10-year yields to rise to about 2% over the next 12 months. And that level will attract more investment flow .

“The increase in returns from there will be much slower. And the Ministry of Finance will be more attractive,” he said.

write to Anna Hirtenstein at anna.hirtenstein@wsj.com

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