International central banks are selling the most Treasuries since the credit crisis began just as institutional investors load up on US government bonds.
The Federal Reserve said its holdings of US government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 billion (Dh280.9 billion) in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45 per cent in the past five years and the Fed has added $656 billion to its balance sheet this year.
Rather than a referendum on the US's $1.3 trillion budget deficit and rising debt burden, sales by foreign policymakers may have more to do with supporting their currencies after the Brazilian real weakened 9.8 per cent and Taiwan's dollar lost 4.4 per cent against the US dollar since June. With economists forecasting inflation slowing to 2.1 per cent in 2012 from 3.1 per cent this year and the Fed's commitment to keeping interest rates near zero, investors say the demand that pushed government bond yields to record lows last month will be sustained.
"Demand will come from banks, insurance companies and from pension funds which are still massively underexposed to Treasuries," Stuart Thomson, a fixed-income fund manager in Glasgow at Ignis Asset Management, which oversees £75 billion ($118 billion), said in an October 12 telephone interview.
Progress on a plan that may provide more funds for European bailouts while imposing writedowns on Greek bonds damped demand for the perceived safety of Treasuries for a third week in the period ended October 14. Germany's Chancellor Angela Merkel and France's President Nicolas Sarkozy set November 3 as a deadline for a plan to resolve the crisis. Slovakia, on October 13, became the last of the 17 euro countries to ratify the €440-billion ($607.9 billion) European Financial Stability Facility.
European officials on October 14 outlined the initiatives they're considering at a meeting in Paris of finance ministers and central bankers from the Group of 20 economies. The strategy, which has still to be made public, includes writing down Greek bonds by as much as 50 per cent, establishing a backstop for banks and multiplying the strength of the enhanced EFSF, people familiar with the matter said.