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U.S. pension funds shifted $90 billion from stocks to fixed income investments during the first quarter of this year, putting $41 billion in U.S. treasury bonds, Bank of America reported.
A 26 May auction of five-year T-bonds drew more bids from foreign investors than any such auction since last August, the Wall Street Journal said. Data from the U.S. treasury showed that foreign investors stocked up on longer-maturity treasury securities in March.
The yield on the benchmark 10-year T-bond closed at 1.462 percent on 11 June, close to its lowest level in three months. Yields fall when bond prices rise during periods of greater demand.
Inflation often drives investors away from fixed-income assets such as bonds. That can be especially true for conventional bonds, which have fixed cash flows that lose value as inflation rises.
However, the dollar has lost about 2.4 percent of its value so far this quarter and is nearing its lowest level in five months, the WSJ pointed out, making T-bonds cheaper for foreign investors.
The dollar’s value has weakened as greenbacks have flooded out of the U.S. treasury in stimulus payments, unemployment benefits, loans to businesses, and other measures to buoy the economy through 2020’s crisis.
In addition, Americans saved at record rates last year, adding to the ocean of American dollars bathing the world’s financial markets.
Cash on deposit with U.S. commercial banks now totals a record $17.1 trillion, according to the Federal Reserve Bank of St. Louis.
Also, bond-buyers tend to favor the stability of U.S. government securities during economic turbulence and uncertainty.
Even better, with negative interest rates in Europe, U.S. securities pay better than those of Europe’s central bank.
“If you take a 10-year U.S. treasury and hedge with a three-month forward, the yield is around 0.9 percent,” a better yield than is now available anywhere in Europe, Althea Spinozzi, a fixed-income strategist at Saxo Bank, explained to the WSJ.
Yields on the 10-year T-bond will reach 1.9 percent by the end of this year, according to the median of 47 estimates collated by data firm FactSet, the WSJ reported.
When yields reach 2 percent, “the rise in yields from there will be a lot slower,” strategist Michael Bell at J.P. Morgan Asset Management said to the WSJ.
TREND FORECAST: As the global economic crisis ebbs, portfolio managers around the world are expected to shrink their holdings of U.S. government securities and invest instead in stocks and other assets that will grow more with an economic revival, the WSJ said.
However, when the Federal Reserve raises interest rates, less money will go into equities and more into U.S. government securities.