Feb 19, 2020 - Economy & Business

Foreign governments continue to shun U.S. government debt

Illustration: Aïda Amer/Axios

Foreign private buyers continue to pile onto U.S. government debt while foreign governments again pulled money out, led by China.

What it means: The U.S. Treasury International Capital Report showed a net inflow of $78.2 billion — $134.2 billion of foreign private inflows and net foreign official outflows of $56 billion.

  • Chinese government holdings of U.S. Treasury bonds fell for the sixth straight month in December, dropping by $19.3 billion.

Why it matters: Market analysts say the decline in foreign government holdings of Treasury bonds and the increase of issuance due to steadily rising U.S. budget deficits may be a prime factor in market stress, including issues in the structurally important repo market that banks use to get fast cash.

The big picture: For 2019, private buying netted to $197.6 billion, while official government purchases declined by $332.2 billion, BMO Capital Markets said in a recent note.

  • There has been "a more pervasive theme" of reserve managers cutting back their Treasury buying as the government has issued more debt, and foreign officials' holdings have been little moved since 2014 despite an increase of around $5 trillion in debt.
  • That gap has largely been filled by the Fed's recently restarted bond buying program and private foreign sources.

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Weak U.S. debt auction shows market sees even lower rates

Illustration: Rebecca Zisser/Axios

The Treasury held an incredibly weak auction of 2-year government debt Tuesday that saw primary dealers, who are essentially on clean-up duty, take home their highest share of the auction since December 2018.

What it means: Even though yields on the 2-year note have fallen by nearly 40 basis points this year, traders are convinced that there is "certainly more room for yields to fall," Ben Jeffery, rates analyst at BMO Capital Markets, tells Axios.

The world's debt situation is much worse than in 2008

Illustration: Rebecca Zisser/Axios

Perhaps the biggest risk for financial markets is the potential for wide-ranging debt defaults, particularly as companies have significantly increased their debt load and more are rated at the bottom of the investment grade ratings scale.

Why it matters: The world's companies are in a much worse position amid the coronavirus pandemic than they were ahead of the global financial crisis.

Companies are behaving like it's a recession

Illustration: Aïda Amer/Axios

Despite historically low interest rates, U.S. companies are being unusually frugal, holding back on issuing new debt and pumping up their balance sheets with cash.

Why it matters: Historically, when interest rates are low and the economy is strong, companies have levered up to increase capital expenditures and buy assets in order to expand. The opposite is happening now.