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Jamie McGeever: Foreign central banks think twice on U.S. Treasuries
By Jamie McGeever
Reuters
Tuesday, January 23, 2024
If foreign investors en masse are gorging on U.S. Treasuries, central banks may be beginning to lose their appetite.
Official U.S. flows data show that overseas private-sector investors -- banks, asset managers, insurance funds, pension funds, retail investors -- are loading up on Treasuries while the official sector's holdings are flat-lining at best.
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As long as this active or de facto retreat from central banks is more of a whimper than a bang, the $26 trillion U.S. government bond market should be relatively unaffected. One group of buyers is simply replacing another.
But it may come with a price -- a rising "term premium." That's the amorphous amount of compensation investors demand for buying long-dated bonds instead of rolling over bills. It is the premium for unquantifiable risks in the future beyond current assumptions on the long-term path of inflation or policy rates.
Price-sensitive buyers with more of an eye on generating returns may not always be as reliable as price-insensitive buyers perhaps more concerned with capital preservation, liquidity, and cautious reserve management goals.
Foreign central banks and the U.S. Federal Reserve were the two price-insensitive buyers and holders of Treasuries for many years, and their huge demand helped explain why term premium went negative even as U.S. borrowing rocketed.
But both are now backing away -- the Fed is reducing its balance sheet and foreign central banks are no longer buying in as large size. Indeed, there are signs they are actively selling. ...
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