Foreign Central Banks Use Treasury Rout as Buying Opportunity

Updated on

Overseas central banks are piling into Treasuries in the face of the longest market rout this year.

Foreign official accounts raised their holdings of U.S. securities in custody at the Federal Reserve to $2.99 trillion as of May 13, the highest level in 2015, based on Fed data. Investors also clamored to buy Treasuries at government debt auctions this week, after a selloff that pushed U.S. 10-year yields to a six-month high of 2.36 percent this week. Treasuries climbed a second day Friday as a global rout in fixed-income assets eased.

“For governments and central banks, this is a big chance to buy Treasuries,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management, which oversees $112.5 billion. “The Treasury yield compared to other countries is attractive.”

Benchmark Treasury 10-year note yields declined two basis points, or 0.02 percentage point, to 2.21 percent as of 7:08 a.m. New York time. The 2.125 percent security due in May 2025 gained 7/32, or $2.19 per $1,000 face amount, to 99 1/4.

The 10-year yield has risen about 57 basis points from this year’s low in January, and is 95 basis points more than the average of the other Group of Seven nations, according to data compiled by Bloomberg.

The U.S. has sold $64 billion of coupon-bearing debt this week. Demand at this week’s offerings of Treasury three-, 10-and 30-year securities was higher than for the equivalent series of auctions last month.

Indirect Bidders

Indirect bidders, a class of investors that includes foreign central banks, bought 50.8 percent of the securities at Thursday’s $16 billion 30-year bond sale, compared with an average of 48.6 percent at the past 10 auctions.

So-called indirects surged at Wednesday’s $24 billion 10-year note sale to the highest level since December 2011, while demand at Tuesday’s $24 billion three-year note sale was the highest since December 2009.

“Demand has been generally pretty good at auctions because they are liquidity events,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “People who want to commit a large amount of money to the market will probably use that event.” With higher yields “it’s not absolute good value, but it’s better for markets to put money to work,” he said.

The U.S. plans to report total overseas holdings of Treasuries for March on Friday. Japan overtook China as America’s largest creditor in February, as the amounts held by both nations declined that month.

Treasuries advanced after a Labor Department report Thursday showed producer prices unexpectedly declined in April, adding to doubts about whether the Fed will raise interest rates this year. Reports Friday are forecast by economists to show New York’s Empire Manufacturing index rose in May, while industrial production stagnated in April.

U.S. government securities still headed for a fourth successive weekly loss, the longest run of declines this year. The Bloomberg U.S. Treasury Bond Index has fallen about 2 percent in the period.