Loading ...Foreigners Scramble To Buy US Debt Every Time Rates Risethe selloff observed in 2016 is now clearly over, and as of the week of July 26, foreign holdings of US paper parked at the Fed were back over $3 trillion, and just why of all time highsUS credit remains fundamentally expensive with HY and IG spreads roughly 1.1 and 1.3 standard deviations rich. But managers are long credit as growth is deemed reasonable enough to keep default rates below average and industry pressures from low interest rates, QE and passive vehicles is forcing many managers into the market. Some of our key signals are flashing yellow, but fall short of red flags. Our forecasts call for normalization in spreads towards fair value, with weak corporate earnings, policy uncertainty, waning foreign demand and lower oil prices as key downside risks; conversely, tax reform and oil prices into the $50s are upside risks. In the US our core positioning view favors intermediate US high grade bonds, particularly bank bonds as well as floating rate loans (relative to high yield), acknowledging expensive valuations.
Finally, looking at just the Treasury market using the most up to date proxy available, the Fed’s Custody Account, the selloff observed in 2016 is now clearly over, and as of the week of July 26, foreign holdings of US paper parked at the Fed were back over $3 trillion, and just why of all time highs. So much for that great foreign dumping of US Treasurys.
