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This One Word Explains Why Foreign Investors Are Going To Eat US Government Debt

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In short – yield.

Income from the purchase of long-term US Treasuries far exceeds other comparable government bond markets in the UK, Germany and Japan, even after accounting for the cost of hedging the risk of currency fluctuations, noted analysts at Bofa Global Research.

This is an important question for foreign investors who must limit the damage caused by currency volatility which can easily wipe out the meager income generated by long-term bonds.

Continued demand from abroad will also reassure the US Treasury Department in its funding annual deficits of $ 1 trillion over the next decade.

In a chart below, BofA shows that the extra yield from Treasuries relative to their peers has exceeded their historical averages, suggesting that the appetite of cash-strapped European and Japanese investors may persist this year.

While rising yields can lead to painful losses for bondholders, fund managers have welcomed the steady rise in U.S. Treasury yields over the past six months as the search for returns from assets at Fixed income has become an increasingly difficult task after central banks around the world have reduced their political interest rates to near zero or below in an effort to revive their economies.

See: Rising US Treasury Produces “Savior” for Cash-strapped Investors

Even though US yields are already very attractive to the rest of the world, analysts at BofA Global Research have estimated that foreign investor interest will really start to pick up when the 10-year Treasury yield hits around 1.5% at 1.6%.

The benchmark maturity TMUBMUSD10Y,
1.321%
was trading at 1.191%.

But the relationship between Treasuries and foreign demand is unclear.

Last year the weaker US dollar DXY,
-0.04%
The incentive reserve managers of foreign central banks buy more dollar-denominated assets in order to ward off the appreciation of their own currencies. Yet if higher yields reverse the greenback’s fall, this important pool of investors could pull out of US markets.

Read: World central bank interventions raise specter of “currency war”


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