US government bond market steady as PBOC, other central banks, pare back holdings
Central banks around the world have offloaded in excess of US$ 100 billion in US Treasuries, on a net basis, over the past year, marking the largest 12-month cumulative decline since US government records began following such transactions in 1978.
The People’s Bank of China has sold around $200 billion since the start of the year. Central banks in Russia, Brazil and Taiwan have also pared their holdings.
Yet rather than trigger an economic catastrophe, the Treasuries market has so far held up. Yields have fallen marginally, suggesting the asset class, long seen as a safe haven, remains in high demand given global economic uncertainties, even if some foreign investors have decided to reduce their holdings.
“Bond yields are driven mostly by expectations for growth and inflation, rather than by who is buying and who is selling,”wrote Kathy Jones, chief fixed income strategist at US brokerage giant Charles Schwab in a recent report.
Publicaly traded US Treasuries is a $12.7 trillion market with overseas investors holding around US$ 6 trillion, though that number had doubled since 2008. Data from Bloomberg suggests that US domestic investors are increasing their share of the market, with American funds purchasing 42 per cent of the US$ 1.6 trillion of notes and bonds sold at auctions this year, the highest since the Treasury department began issuing this data in 2011.
China’s central bank in recent years has been the largest overseas holder of US Treasuries, accumulating around US$1.4 trillion. These funds are allocated from its currency reserve. The idea is that Treasuries are a relatively low risk and high liquidity interest bearing asset class, and that it makes sense to hold the world’s reserve currency.
And by supporting US debt markets, the PBOC has also helped US consumers spend more, boosting Chinese exports.
But does the reversal in central bank purchases of Treasuries point to a different dynamic underway?
“Central banks in China and emerging market countries have been selling some of their reserves in order to generate cash that they can use to buy—and thus shore up—their own currencies,” Jones wrote.
The PBOC reported reserves dropped US$ 94 billion to US$ 3.56 trillion in August following a surprise devaluation of the yuan earlier that month. Reserves were at US$ 4 trillion in June last year.
“Since most central banks hold a large proportion of their reserves in U.S. Treasury securities...they have no incentive to ‘dump’ Treasuries, as that would potentially cause a decline in the value of their own reserves. Orderly selling over time is more likely.”
For now it will take a lot more for this asset class to fall out of favour with global investors.