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