Foreign Demand Soars for U.S. Treasurys, the 'One-Eyed King'

The world is hungry for U.S. government bonds.

Thursday's $12 billion sale of 30-year Treasury debt attracted some of the highest foreign demand ever, following a $20 billion sale of benchmark 10-year Treasury notes in which buying from overseas reached a record high.

The strong demand shows the appetite around the world for better-yielding government bonds as yields on debt in Germany, the U.K. and Switzerland hits record lows. Both the 10-year German and U.K. government debt yields touched fresh all-time lows during Thursday's trading. Yields on Germany's 10-year government bonds are just four hundredths of a percentage point away from turning negative, which means investors would get back less than they paid if they held the bonds to maturity.

Those lower yields are driving buyers into the U.S. Treasurys market, one of the few places left in the developed world where investors can get positive income from ultrasafe government debt thanks to aggressive moves by central banks in Japan and Europe.

U.S. Treasury bonds are the "one-eyed king," said David Keeble, global head of interest-rates strategy at Cré dit Agricole. "There is just a shortage of yield on the planet."

Indirect bidding, a proxy of demand from foreign central banks and private-sector buyers, jumped to 64.9% in Thursday's auction of 30-year Treasury bonds, up from an average of 60.1% in the past four sales. For Wednesday's 10-year auction, indirect bidding reached 73.6%, just topping the 73.5% record set a month earlier.

Piling into long-term bonds exposes bond investors to the risk of large losses if interest rates rise. The longer the maturity, the more sharply a bond's price falls in response to a given rise in rates. Bond yields and prices move inversely to each other.

Buyers aren't getting much income from long-term bonds to compensate for that risk.

Money managers say they recognize the risk. But with European Central Bank and the Bank of Japan continuing to mop up high-grade government bonds, the competition for private-sector investors to obtain these debt instruments may get even more intense and send yields lower still.

"There is no limit to how low 10-year yields in Treasurys or German bunds can go," said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut.

Wednesday's 10-year auction offered a yield of 1.702%, down sharply from the 2.461% investors got from a 10-year sale a year ago. Two years ago, buyers got an even higher yield at 2.648%.

Thursday's 30-year bond auction offered a yield of 2.475%, the lowest for the same-maturity supply since January 2015.

Even so, U.S. bonds remain a relative steal. The yield on the 10-year Treasury note trading in the secondary market was 1.675% Thursday, just slightly above its 2016 closing low of 1.642% set on Feb. 11. While that is down more than half of a percentage point this year, yields in Japan and Europe were at even more depressed levels. The 10-year German bond yielded 0.037% and the 10-year U.K. bond yielded 1.245%. The 10-year Japanese and Swiss bonds both yielded below zero.

Analysts say central banks' moves to stimulate the economy have distorted market signals and made it difficult for investors to assess the fair value for bonds.

Some investors, put off by slim yields in Treasury bonds, have scooped up higher-yielding corporate bonds and mortgage-backed securities. Some prefer stocks. Even zero-yielding gold has rallied this year.

Lynn Chen, senior portfolio manager at Aberdeen Asset Management, which had $420.9 billion in assets under management at the end of March, said she preferred government bonds in Australia, which offer more attractive yields than the U.S.

Ms. Chen said the simultaneous strengthening of safe-haven bonds and stocks might not be sustainable. She said Treasury bond yields may be the one to give. They could rise later this year as the U.S. economy has been resilient, worries over a sharp slowdown in China have eased and oil prices have risen sharply from their 2016 low in February, she said.

But some investors have to make do with skinny government bond yields, because they have the mandate to invest in high-grade sovereign debt. Some still see Treasury debt as a hedge in case riskier markets suffer a large loss, especially with U.S. stocks already trading near a record high and becoming more expensive to buy.

One boost for Treasury debt Thursday was uncertainty over the U.K.'s continued membership in the European Union. A referendum on the question is due later this month. Analysts have warned that if the U.K. leaves the EU, it could rattle sentiment over the global economy and drive investors out of riskier assets and into havens like U.S. Treasurys and German bunds.

"The global demand for fixed income products, seemingly at any price, remains profound around the world," said Thomas Simons, a money market economist at Jefferies in New York.

Write to Min Zeng at [e-mail]

(END) Dow Jones Newswires

June 09, 2016 15:35 ET (19:35 GMT)

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