The recent data illustrating the unexpectedly enduring U.S. inflation rates are prompting a renewed examination of the demand for U.S. Treasuries.
Amidst this, bonds are experiencing significant downturns, with yields reaching their highest levels in nearly half a year, reflecting investor concerns over the possibility of the Federal Reserve refraining from interest rate cuts throughout the year.
“Inflation, as measured by the core personal consumption expenditures price index, was 3.7% in the first quarter, well above the 3.4% consensus forecast,” indicating a notable acceleration from the preceding quarter, one of the swiftest rises in over three decades.
Consequently, the pressure on bond prices is evident, with the two-year Treasury yield surging above 5.00% for the first time since November, and the 10-year yield climbing 50 basis points in under a month.
Even the iShares 20+ Year Treasury Bond exchange-traded fund has plummeted by 10% this year.
Despite apparent robust demand for Treasuries, particularly from foreign investors, questions linger regarding the sustainability of this trend.
“There is evidence that foreign investors have been stepping up in recent months, although their overall footprint in the Treasuries market is shrinking,” underscoring the complexity of the situation.
While foreign holdings have reached record levels, exceeding $8 trillion, there’s uncertainty about whether this influx of capital can stem the rising borrowing costs.
Treasury International Capital (TIC) flows data indicate a consistent increase in foreign holdings, suggesting sustained interest from abroad.
However, the secondary market is struggling to keep pace, signaling a need for substantial private sector participation to stabilize yields.
This discrepancy raises concerns among analysts and policymakers alike.
Amidst these dynamics, investors are demanding higher yields, particularly given the persistent inflation rates deviating from the Federal Reserve’s target.
Domestic institutions, including banks and non-bank entities, hold a substantial portion of U.S. federal debt, yet the recent aversion to bonds suggests a broader market sentiment.
Quincy Krosby of LPL Financial emphasizes the necessity of a “healthy distribution” of buyers to support Treasury markets, highlighting the anticipation for capital appreciation as yields remain elevated.
Despite the allure of “risk-free” yields exceeding 5%, investors remain cautious, suggesting a reluctance to fully embrace bonds amidst prevailing uncertainties in the economic landscape.