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Markets
Foreign Investors Pile Into Bonds
From the Wall Street Journal of Tue, 16 Dec 2014 02:04:09 EST

Foreign investors are snapping up Treasury bonds at the fastest clip in two years, propelling yields to fresh lows even as the U.S. economy gains steam.

Purchases by China, Japan, Switzerland and others underscore the broad demand for safe government debt amid global turmoil and uneven economic growth, according to new data from the Federal Reserve and Crédit Agricole.

The overseas buying helps to unravel a mystery that has vexed commentators in 2014: How can bond prices keep rising and yields falling alongside gathering U.S. growth?

Bond-price gains have confounded Wall Street forecasters and driven the yield on the 10-year U.S. note to 2.12% Monday from 3% at the end of 2013. Many strategists entered the year expecting U.S. yields to approach 4%, though most have downgraded those projections.

Many analysts and portfolio managers say the foreign demand for U.S. Treasurys likely will help moderate any bond selloff in 2015, despite widespread investor expectations that the Fed for the first time since 2006 will raise its short-term federal-funds interest-rate target.

Many nations, including China, purchase U.S. debt to manage their exchange rates and increase their export-related industries.

At the same time, U.S. bonds likely will benefit from any market unrest centering in emerging markets, traders and investors said. Treasurys have long been sought after by those seeking safety when market volatility picks up and the prices fall on risky assets like stocks and low-rated bonds, as seen around the globe in recent days.

“Lower long-dated Treasury yields are here to stay,” said Guy Haselmann, head of U.S. interest-rate strategy at Bank of Nova Scotia in New York.

Foreign central banks and private investors bought a net $284 billion of Treasury debt over the first nine months of 2014, according to Jonathan Rick, interest-rate derivatives strategist at Crédit Agricole. That compares with $83.2 billion over the equivalent stretch in 2013, a period that included the so-called taper tantrum in which investors sold Treasurys en masse as the Fed prepared to begin rolling back its monthly stimulus.

To be sure, the overseas buying remains well below its peak following the 2008 financial crisis and the 2011 eurozone debt crisis.

But tumbling oil prices have helped crystallize investor worries over stagnant growth in the eurozone and Japan and slowdowns in many emerging-market countries.

U.S. bonds continue to offer more-attractive yields than other bonds in the developed world, and a stronger dollar—which many analysts expect to rise further in 2015—enables foreign investors to pick up extra returns on U.S. investments.

On Monday, the yield on 10-year government bonds was 0.375% in Japan, 0.625% in Germany, 0.897% in France and 1.807% in the U.K.

China has bought a net $155 billion of Treasury debt this year through September, according to data from the U.S. Treasury. The data excl

ude bonds maturing in a year or less, known as bills.

Holdings rose a net $39.3 billion in Japan, $16.9 billion in Brazil and $9.5 billion in Switzerland. Belgium, which analysts say is used by nations including China for Treasury transactions, rose $97 billion.

Some analysts say demand from China, the biggest foreign owner of U.S. Treasury debt, with $1.27 trillion at the end of September, could slow along with economic growth there.

A rising dollar has weakened many foreign currencies, the yuan included, as investors brace for rising U.S. rates in 2015. That shift potentially will reduce the need for China to sell its currency and buy Treasurys with the proceeds to keep the yuan’s exchange value down.

“Given the big picture of an economic slowdown, a weaker yuan and China’s inclination to get into other investments, their buying of Treasury bonds should be on a structural decline as a longer-term trend,’’ said Stanley Sun, interest-rate strategist at Nomura Securities International in New York.

But Tom Tucci, head of Treasury trading in New York at CIBC World Markets Corp., is confident that “as long as the dollar remains strong,” China and other investors will be buyers.

Not everyone is sold. Michael Cloherty, head of U.S. interest- rate strategy in New York at RBC Capital Markets, expects the 10-year Treasury yield to climb above 3% at the end of 2015.

“The bond market rally this year has caught many by surprise, but the rally is overdone,’’ said Mr. Cloherty. ”Yields at these low levels haven’t priced in higher interest rates from the Fed.”

Regardless, buying U.S. Treasury bonds has been a winning strategy this year for investors. The debt has a total return, reflecting price appreciation and interest payments, of 5.3% this year through Friday, according to Barclays PLC. Over the same period, the S&P 500 has returned 15% and low-rated corporate bonds 0.8%.

U.S. banks also increased Treasury debt holdings by $141.9 billion between January and September, following the imposition of rules aimed at beefing up banks’ capacity to withstand future shocks.

Write to Min Zeng at min.zeng@wsj.com



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