Raymond James Update: Foreign Investors Now Playing Second Fiddle in Treasury Market

Raymond James Bond Market CommentaryDissecting The Trend
By Benjamin Streed
September 24, 2012

Over the last two weeks yields have been on quite a rollercoaster ride; first they spiked higher pre-QE3 announcement (Quantitative Easing), and generally held their new levels until last week when the market completely reversed-course. The yield on the 10-yr note rose as much as 12bp to 1.88%, which marked its highest level since mid-June, before falling back to 1.72%. Interestingly, despite this pullback in yields it appears that domestic purchasers of Treasuries are returning to the market at a fast pace. Data from the Treasury department shows that foreign investors are now playing second-fiddle to domestic purchasers for the first time since 2010. Domestic investors grew their purchases by nearly 11% so far this year to $3.6 trillion, while foreign buyers only increased their buying by 6.9%. The stark change is made clear by comparing these figures to last year; in 2011 foreign buyers increased their holdings of U.S Treasuries by 13% while their domestic counterparts actually shrunk their holdings by nearly 5%. According to data from the Fed, U.S. households increased their holdings of Treasuries by a record-breaking 51% to $878 billion in the first half of 2012 which compares to a meager 4% increase seen by pension funds over the same time period. Part of the recent uptick in domestic purchasing could be fueled by the record-setting amount of funds being put into bond mutual funds. According to the Investment Company Institute (ICI) nearly $17 billion per month found its way into such funds over the last year alone. Interestingly, the same data show that over 80% of all funds moving into the fixed income market are attributable to the taxable side of the bond market.

Overseas, Europe continues to make headlines with its ongoing debt crisis. One day Spain is struggling to keep bank deposits inside the country, the next the federal government of the very same country is able to lower its overall borrowing costs at auction. Spain was able to sell €7.8 billion 9$6.2 billion) of bonds last week, marking the largest demand for the country’s debt since January. Interestingly, it appears that the Spanish Treasury department focused on selling short-term debt, with 3-year maturities representing the largest share, as the country believes that these notes will likely be purchased by the European Central Bank (ECB) in the case of a Spanish sovereign bailout. Yields for many of the struggling countries in the E.U. have fallen since ECB President Mario Draghi noted on August 2nd that the bank may directly buy debt from countries that need to lower their borrowing costs. Further interesting details emerged from the auction that addressed some of the banking concerns; apparently domestic banks in Spain have been upping their takedown of recent auctions, helping push down yields, despite foreign investors withdrawing their bids. Spanish banks now hold 32% of outstanding debt as of the end of July, up from only 17% at the end of 2011 while foreign investors dropped their holdings from nearly 50% to only 34% over the same period.

Disclaimer:

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section ofinvestinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.

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