Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

The indefatigable rally in U.S Treasuries may soon have an end after all.

The $13.4 trillion market for U.S. government debt appears to be on the brink of a cooling off period after its biggest return to start the year since 2008. That's because foreign buyers, who have been a huge part of the recent gains, are becoming less interested in the debt.

Getting Full
Foreign investors have been slowing their purchases of U.S. Treasuries
Source: U.S. Treasury

Their purchases may soon taper off even more. While sovereign bond yields from Japan to Europe are still way below rates on Treasuries, it's becoming more difficult for investors in those countries to profit from the difference, Pimco money manager Sachin Gupta noted in an article dated Monday.

The reason is it's getting more and more expensive to hedge against any fluctuations in the dollars versus the euro and yen. The cost of that hedge greatly diminishes any potential advantage U.S. Treasuries have over local sovereign debt, Gupta wrote.

Expensive Hedge
It has become more expensive for European investors to hedge out currency risk when buying Treasuries
Source: Bloomberg

This is especially significant as Treasury yields plumb depths never seen before because the extra cost eats away the little extra yield that remains. 

Yield Collapse
Yields on U.S. Treasuries have fallen to new lows this year amid record-low rates globally
Source: Bloomberg

Meanwhile, Japan is holding back from lowering its benchmark rate further or buying more bonds, which has allowed yields in the region to rise a bit.

It has been a fool's errand to bet against the U.S. Treasury market. Wall Street analysts have been warning about a selloff in the notes for years, which hasn't materialized in a meaningful sustained way. Yields on the debt plunged to new lows just last month.

But this time, there's a significant shift. Without foreign demand for U.S. Treasuries, investors will be forced to look at the actual fundamentals underpinning the American economy. They're not terrific, but they're not so bad as to warrant current Treasury yields.

While it's been difficult to get the U.S. bond market right in the past few years, Pimco's Gupta highlights an important point. And with foreign demand waning, it's hard to see how Treasuries can sustain their rally.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net