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Foreign bond investors are “extremely concerned” about US deficits, according to insights from TD Securities analyst Gennadiy Goldberg.
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Concerns arise as demand for US Treasury bonds shows signs of waning.
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The possibility of US assets being dumped by Japan and China creates substantial uncertainty in bond markets.
Foreign buyers are now a source of worry for the Treasury-bond market, with increasing federal deficits posing a significant risk, as highlighted by TD Securities analyst Gennadiy Goldberg.
In an interview with Insider, Goldberg notes the global rise in yields that could exert upward pressure on US rates to maintain competitiveness.
“Additionally, the inability to control our deficits, which continue to grow, exacerbates the issue,” he explains. “This lack of control is concerning for foreign investors, particularly those overseas. Every foreign investor I’ve spoken to recently expresses extreme concern about the trajectory of US deficits.”
This warning comes as government overspending is projected to drive up US debt, with some observers even suggesting the possibility of default in the future. In August, Fitch Ratings downgraded the US credit rating, highlighting a deterioration in fiscal governance.
While US bond yields have recently retreated following a period of hitting 17-year highs due to a massive bond sell-off, risks in the bond market persist. Several auctions of longer-dated Treasuries have encountered lackluster demand, with a crucial test upcoming at the 10-year and 30-year bond auctions this week.
Last week, a key advisory group to the Treasury Department warned about early signs of weakening demand coinciding with an increase in supply.
According to Goldberg, the surge in global interest rates is causing significant concern among investors. “For a long time after 2008, the US offered higher yields when other countries like Europe and Japan had negative interest rates. However, that scenario has changed,” Goldberg told Insider.
In particular, China and Japan are poised to disrupt the market in the near term since they hold the highest amount of US debt globally.
The Treasury advisory group also highlights the risk posed by the strength of the US dollar, which may incentivize foreign central banks to shed Treasury holdings to support their respective currencies.
In Japan, authorities are considering an end to ultra-loose monetary policy, potentially causing a shift in investor positions from Treasuries to Japanese bonds.
Similarly, the decline in the Chinese yuan may prompt Beijing to dispose of more Treasuries. While there is debate over whether China has actually sold or simply moved to other accounts, the mere risk of Beijing and Tokyo selling off assets is a serious concern.
“The threat of them selling more assets is, in my opinion, more destabilizing for markets,” Goldberg added.
Read the original article on Business Insider
