Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carroll, and
Speaker 1: this is Here's Why, where we take one new story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. Bond market is very tricky.
Speaker 2: I was watching it, but if you look at it now,
Speaker 2: it's beautiful. The bond market right now is beautiful.
Speaker 1: But yeah, I saw last night where people were getting
Speaker 1: a little queasy. Donald Trump's trade tariffs have investors on edge.
Speaker 1: The wild swings in prices of US government debt and
Speaker 1: the volatility and borrowing costs that comes with it have
Speaker 1: been the most glaring example of a loss of confidence
Speaker 1: in what's long been considered a safe investment. Foreign investors
Speaker 1: hold trillions of dollars in treasuries, so what happens if
Speaker 1: they decide to put their money elsewhere.
Speaker 2: Japan and China are two of the largest holders of
Speaker 2: US treasuries, and if they decide that they don't want
Speaker 2: to show up an auction, it's going to be very tricky.
Speaker 1: I think what the treasury market is telling us is
Speaker 1: that there is not a lot of balance sheet availability
Speaker 1: to absorb all this treasury selling. Twenty twenty five feels
Speaker 1: like a US driven situation and willingness on the part
Speaker 1: of foreign investors to liquid date dollar assets. Treasuries are
Speaker 1: part of that complex. Here's why America's debt is a
Speaker 1: trade war victim. Our managing editor for FS and Rates,
Speaker 1: Rachel Evans, joins me. Now for more. Rachel, First of all,
Speaker 1: how important are foreign buyers for US government borrowing?
Speaker 2: Very important. They comprise about a third of ownership for
Speaker 2: the treasury market, so it's a significant piece of the pie.
Speaker 2: And there's some analysis out there from Barklay's that that's
Speaker 2: interesting that suggests that last year so foreign buyers were
Speaker 2: really taking down like a large chunk of the debt
Speaker 2: issuance that the US was putting out there. These are
Speaker 2: all different types of owners. You've got pension funds, you've
Speaker 2: got insurers, and you've also got central banks that are
Speaker 2: sticking these into their reserves theoretically as kind of a
Speaker 2: pillar of stability for themselves.
Speaker 1: The term buyer strike might sound quite encendry in a
Speaker 1: lot of ways, but what would a buyer's strike look
Speaker 1: like in the US treasury markets?
Speaker 2: Yeah, I think, simply put, and we haven't really seen
Speaker 2: this necessarily, so it's kind of hard to exactly what
Speaker 2: it would look like, but simply put, you would see
Speaker 2: yields continually rising day after day, and particularly at the
Speaker 2: long end. When we look at kind of the division
Speaker 2: of the types of treasuries that are owned by foreign buyers,
Speaker 2: it tends to skew towards longer dated debts, so thirty
Speaker 2: year debts. So if you're starting to see yields really
Speaker 2: kind of rocketing up at the long end in thirty
Speaker 2: year debt, boring costs really sawing their day after day
Speaker 2: after day, that would be an indication that you're starting
Speaker 2: to see foreign buyers pulling back, and.
Speaker 1: So far, no sign of that that we've seen in markets.
Speaker 2: We've seen little dribs and drabs, but we haven't kind
Speaker 2: of seen the sort of the prolonged action that you
Speaker 2: would necessarily sort of view as being kind of a
Speaker 2: bier strike. We had a slightly iffy auction earlier in
Speaker 2: the week where we saw year debt sort of struggling
Speaker 2: to find as much demand as it might sometimes, and
Speaker 2: we've seen steeper yield cup so that the back end
Speaker 2: of the curve selling off more those yields on thirty
Speaker 2: year debt rising more so that does indicate sort of
Speaker 2: the potential for demand overall is kind of diminishing a
Speaker 2: little bit. And I was also taken by some analysis
Speaker 2: that our colleague Cameron Christ did that suggested that since
Speaker 2: Trump's inauguration, we've actually seen most selling outside of US hours.
Speaker 2: So that tells you that in terms of who is
Speaker 2: doing the selling, that it is often coming from overseas.
Speaker 2: So there's been these kind of little hints of unease
Speaker 2: I think amongst kind of foreign investors, but we've not
Speaker 2: seen kind of the action that would suggest sort of
Speaker 2: a or bona fide by a strike that's really going
Speaker 2: to be there for the longer term.
Speaker 1: So we're determined to sort of pullback that we would
Speaker 1: term a strike in this context. I mean, if it
Speaker 1: were to happen, theoretically, what would a last of foreign
Speaker 1: interest in US debt mean for the US government?
Speaker 2: I mean very simply higher yields, so higher borrowing cost
Speaker 2: for the US government. They would need to pay more
Speaker 2: to refinance their debt and to borrow new money. That
Speaker 2: would also have a ripple through effect to things like
Speaker 2: mortgage rates, which track ten year yields and are therefore
Speaker 2: would also be going up so you'd be getting kind
Speaker 2: of that ripple through effect from the US's borrowing costs
Speaker 2: through to sort of the average Americans foreign costs and
Speaker 2: their debt load. You'd also potentially see the US government
Speaker 2: have to rethink how it sells debt. At the moment,
Speaker 2: you know, you have kind of a balance between sort
Speaker 2: of short dated bonds and longer dated securities that's kind
Speaker 2: of set by Treasury to sort of tap into investor interest. Now,
Speaker 2: Scott Bessen has said that he would like to move
Speaker 2: away from having so much debt at the short end
Speaker 2: of the curve, so many bills. He wants more longer
Speaker 2: term debt. However, if your cost of longer term debt
Speaker 2: is skyrocketing upwards, that becomes very very difficult, and the
Speaker 2: need to really issue more short data debt that you
Speaker 2: can pay less on becomes higher. So I think you
Speaker 2: just sort of have to see that the government recalibrating
Speaker 2: how it sells debt in order to make sure that
Speaker 2: it's tapping the investors that do stick around.
Speaker 1: Would the Federal Reserve get involved in this, Whether there
Speaker 1: be a moment at which something would get so dramatic
Speaker 1: that the Central Bank would have to act.
Speaker 2: So the central Bank has it's obviously economic mandate where
Speaker 2: it's thinking about inflation and growth and jobs, so this
Speaker 2: doesn't necessarily impinge on that. They're also looking at kind
Speaker 2: of market functioning. So I think where the FED might
Speaker 2: get involved is where if you see some dislocations and
Speaker 2: some breakages and how the market functions.
Speaker 1: Being extremely abnormal essentially exactly.
Speaker 2: I mean, this is sort of what we saw back
Speaker 2: in like March twenty twenty, when we saw kind of
Speaker 2: a huge liquidation of pretty much every assets but a
Speaker 2: dash for cash, and that really kind of sort of
Speaker 2: broke some of the plumbing in the markets. We saw
Speaker 2: a lot of hedge fund trades and winding very very rapidly,
Speaker 2: and the FED did step in then with various kind
Speaker 2: of facilities to try and kind of ease some of
Speaker 2: the liquidity constraints that were really sort of upsetting the
Speaker 2: market at the time. So there has been some sort
Speaker 2: of conversation in markets about, you know, whether the FED
Speaker 2: could intervene or how they'd intervene. So speculate that maybe
Speaker 2: they could step in and do sort of emergency qe,
Speaker 2: you know, stepping into buy bonds. Others say, no, that's
Speaker 2: not likely, but maybe we could see sort of exemptions
Speaker 2: from the so called supplementary leverage ratio. So the SLR
Speaker 2: kind of restricts how much dealers can have on their
Speaker 2: balance sheet in terms of treasuries. If you suspended that,
Speaker 2: people might have a little bit more room to kind
Speaker 2: of manage a rapid sell off. So there's kind of
Speaker 2: conversations about that, but we haven't got to a point
Speaker 2: yet where those dislocations are particularly severe. In fact, you're
Speaker 2: looking kind of at funding markets. While we are seeing
Speaker 2: sort of an increasing cost, it's still relatively contained and
Speaker 2: I think Beth Hammock of the Cleveland Feds or described
Speaker 2: them as as strained but sort of working.
Speaker 1: Okay, so question marks over that safe haven status rather
Speaker 1: than necessarily a serious attack on us.
Speaker 2: Yeah, I mean, I think what we will see. I mean,
Speaker 2: we are seeing kind of like rallies in European bonds
Speaker 2: this week, and they're providing kind of an alternative to
Speaker 2: those who are seeking havens. I think, you know, there's
Speaker 2: a lot of bigger questions, you know, just kind of
Speaker 2: given this very volatile period we've had since kind of
Speaker 2: the tariff announcement, to what degree, you know, investors overseas
Speaker 2: continue to view treasuries as ballast or is it a
Speaker 2: kind of stable asset that they want to hold as
Speaker 2: a haven. Obviously, the US is still deeply embedded in
Speaker 2: the financial system. This is still a very kind of
Speaker 2: dollar dominated financial system, So that's not going to change overnight,
Speaker 2: but you know, you do sort of see kind of
Speaker 2: subtle shifts happening over years. And I mean a lot
Speaker 2: of people have talked about whether China could, for example,
Speaker 2: get out of its treasury holdings, and there's no indication
Speaker 2: of that happening immediately, but they have been reducing those
Speaker 2: gradually over the last decade.
Speaker 1: Because as we see trade engines with China ramping up,
Speaker 1: is this actually something that could be was a conscious
Speaker 1: decision that might come from Beijing, which would go beyond
Speaker 1: just investors looking elsewhere for more stable investments, but perhaps
Speaker 1: actually a tool in the trade war.
Speaker 2: Yeah, I mean, it's it's a good question to ask,
Speaker 2: and I think you know, a lot of people are wandering,
Speaker 2: given we're in pretty unprecedented times, whether unprecedented trade war
Speaker 2: tools could be deployed. I mean, the Chinese government tends
Speaker 2: to take a more long term picture about these things.
Speaker 2: I mean, as I mentioned, they've been kind of winding
Speaker 2: down some of their treasuries holdings over the last decade.
Speaker 2: You know, they were at one point holding I think
Speaker 2: one point three trillion dollars of US debt that's now
Speaker 2: down to about seven hundred billion, And in fact, Japan
Speaker 2: is now the largest holder overseas of treasuries. So China
Speaker 2: doesn't necessarily have to move kind of immediately, and like
Speaker 2: particularly with great speed, they have a very long term
Speaker 2: view on how to kind of change their policy. But
Speaker 2: it's certainly a kind of underlying concern that they could
Speaker 2: start dumping treasuries at the moment, though, it seems more
Speaker 2: likely that they're going to manage the currency exchange rate
Speaker 2: as kind of their tool as a bit of a
Speaker 2: release volve for some of the pressures that have been
Speaker 2: building up in relation to tariffs.
Speaker 1: Okay, Rachel Evans are managing editor for FX and Rates.
Speaker 1: Thank you for more explanations like this from our team
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Speaker 1: Thanks for listening.