Foreign Interest in US Treasuries Cools
As the cost of foreign exchange hedging continues to rise, foreign investors are reassessing the appeal of US Treasuries. Although US bonds once stood out among global fixed income assets due to higher interest rates, this advantage is now being eroded by the high costs of currency risk hedging.
This year, the US dollar has been consistently weakening, forcing many institutions to increase hedging expenses on US bond investments to guard against currency fluctuations. In this scenario, many international investors find that the actual returns on their domestic bonds are even better than the hedged US Treasury yields.
Diminished Returns on Hedged US Treasuries
At the current 10-year US Treasury yield of about 4.5%, it still appears attractive on the surface. However, the actual returns are significantly reduced. For instance, for eurozone investors, the yield on hedged US Treasuries is up to 60 basis points lower than German bonds. Japanese buyers face an even greater disadvantage of up to 130 basis points.
For over a decade, due to the US dollar's appreciating trend against many major currencies, non-US investors holding US bonds without currency hedging greatly benefited. However, now that the dollar is on a depreciation path, the risks of this strategy have increased significantly.
Capital Flows Back to Domestic Bond Markets
With diminishing or even negative hedging returns, along with uncertain policy and budget outlooks, some Asian investors have begun to withdraw from the US market. For example, the recent unusual movement of the New Taiwan Dollar may indicate that Taiwanese insurance funds are returning to local investments. Japanese institutions are quietly shifting to domestic markets, where the yield on 30-year Japanese government bonds has surpassed 3%, making them comparatively more attractive.
Although pension funds and insurance companies may still maintain some unhedged US Treasury positions, such operations are often based on the premise of a dollar appreciation trend. In the current context, this "no hedge" strategy faces greater uncertainty.
US Treasury Financing Costs May Rise Further
Foreign investors still hold about a quarter of the US Treasury circulation, making them a key funding source for keeping the US Treasury market stable. If further divestment occurs, it will directly increase the financing costs for the US.
Analysts point out that although the total amount of foreign-held US Treasuries has not significantly decreased in the short term, the global market's reaction to the Trump administration's tariff policies and fiscal stimulus plan, occurring alongside the dollar's devaluation, may already suggest a gradual outflow of capital.
Dollar Downtrend and US Treasuries Under Pressure
Facing the triple pressures of dollar depreciation, expanding budget deficits, and rising foreign hedging costs, US Treasuries are gradually losing their advantageous position in global asset allocation. In the future, if the US cannot alleviate the uncertainties in its budget and monetary policies, it may further estrange foreign capital from US Treasuries, thereby having a more profound impact on the overall US financing environment.
