Foreign Demand for Treasurys Is Losing Momentum
Global bond markets showed signs of stabilizing after a broad sell-off earlier this week, but Mohamed El-Erian believes the pressure on US Treasury yields may not be over.
Speaking to CNBC on Friday, the economist pointed to a growing concern in the Treasury market: some of the United States’ most important foreign buyers, including China and Japan, are becoming less willing to purchase US government debt.
El-Erian said the shift is being driven by a combination of domestic economic concerns and geopolitical developments.
Fiscal and Inflation Concerns Add Pressure
Investors have become increasingly focused on the US fiscal outlook, inflation risks and the country’s growing debt burden. These concerns can make Treasury securities less attractive to some overseas investors.
The conflict involving Iran has also weakened several currencies, making dollar-denominated assets such as US Treasurys more expensive for foreign buyers.
At the same time, some governments may prioritize supporting their own currencies, encouraging investors to keep more capital in domestic bond markets.
Japan and China Cut Treasury Exposure
Japan, the largest foreign holder of US Treasurys, has recently sold some US debt as authorities sought to support the yen.
China has also reduced its Treasury holdings significantly. Its holdings of US government debt fell to an 18-year low in June, according to the report.
Norway’s sovereign wealth fund has added another signal of changing investor preferences after proposing to reduce its allocation to bonds. Although the potential reduction would not be large enough to transform the Treasury market by itself, El-Erian said the broader message is important.
“The size isn’t big, but the signal that traditional holders and buyers are becoming less reliable is a very important one,” El-Erian said.
A Fundamental Imbalance in the Bond Market
El-Erian argued that the recent pressure on interest rates is not simply a result of inflation expectations or concerns about Federal Reserve credibility.
Instead, he believes the Treasury market is facing a more fundamental supply-and-demand imbalance as the US continues to issue large amounts of government debt while some traditional overseas buyers become less dependable.
“It has much more to do with a fundamental imbalance than it has to do with inflation or Fed credibility,” El-Erian said.
With little political appetite for immediate fiscal consolidation in the United States, he warned that upward pressure on Treasury yields could persist.
Why Higher Yields Matter
Higher Treasury yields can have broad consequences across financial markets. They can increase borrowing costs for businesses and consumers, influence mortgage rates and put pressure on stock valuations.
For investors, the changing behavior of major foreign holders could therefore become an increasingly important factor in determining where US interest rates go next.
El-Erian’s warning suggests that even if global bond markets stabilize in the short term, the underlying forces pushing US yields higher may not disappear quickly.
