US TIC: Waning foreign demand for USTs - Nomura

Research Team at Nomura, notes that in August, investors started to price in the risk of potentially steeper sovereign curves, driven by rising long-end yields, due to shifting expectations of central bank policies.

Key Quotes

“There was a focus on potential fiscal coordination and changing monetary policies out of Japan, which began to impact UST demand. In addition, the rising FX hedging costs (as a result of US money market reforms) was also turning more punitive for overseas UST investors. That said, while foreign official accounts continued to off-load USTs to the tune of $44bn (this has been consistent with the decline in the Fed’s UST custodian holding), foreign private buying (largely from Europe) has offset some of the official selling pressures.

On the other hand, demand for US agency bonds from overseas accounts remains strong, taking down $29.6bn, with $20.9bn coming from Asian investors alone. Foreign risk appetite for corporate bonds has also stayed elevated with $22.8bn of inflows across European, Asian and offshore accounts.”