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Tags: investors | bond | treasuries | yield

Starved for Yield? US Retail Investors Likely to Seek Treasuries Again This Year

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Thursday, 21 March 2019 02:34 PM EDT

U.S. mom-and-pop investors, the largest buyers of Treasuries last year, are likely to once again drive the flight to American government debt this year, as yields in the largest bond market are still higher than anywhere else, especially on the shortest maturities.

Individuals have been scooping up T-bills at weekly auctions this year at a record pace as interest rates paid on securities maturing in a year or less hit their highest levels in a decade, promising consumers a far greater short-term return than a bank savings account or most certificates of deposit.

And even with the U.S. Federal Reserve signaling this week that its interest rate hikes are likely a fixture of the past , yields on U.S. securities are seen remaining far higher than elsewhere. That should help ease the impact of waning demand from foreign investors for Treasuries, a trend that has been in place in the last few years.

Foreign investors, especially major central banks, have been persistent sellers of Treasuries since 2014, after buying heavily the previous three decades.

But as the U.S. government embarks on a massive borrowing binge over the next 10 years, U.S. investors led by individuals are on the hook for absorbing much of the new supply.

The Congressional Budget Office projected the U.S. budget deficit will grow by a cumulative $12 trillion over the next 10 years to reach 4.4 percent of gross domestic product on an annual basis, compared with the 2.9 percent average over the last 50 years. That translates to annual deficits of roughly $1 trillion.

"We are confident that the domestic sector will be able to absorb new issuance given that it's well-telegraphed that large deficits are coming," said Jon Hill, vice president, fixed income strategy, at BMO Capital Markets in New York.

"Treasuries also act as a very natural hedge against macro risk and that should continue in the future. That sets their place in portfolios," he added.

At bill auctions for the first two months of the year, for instance, individual investments totaled roughly $40 billion, nearly two-and-a-half times the $16.6 billion allotted a year earlier, data from the Office of Debt Management showed.

Demand for 1-month bills has been especially strong. At one auction in late January, individual investors were allotted a record $3.34 billion at a sale of $45 billion in bills, roughly twice the previous high.

A decade of financial repression has bred complacency and because interest rates were so low, investors likely had extra cash in their checking or brokerage accounts.

When the 10-year yield crossed the key 3 percent mark in May last year, U.S. individual investors jumped in and bought Treasuries.

Vincent Deluard, global macro strategist, at INTL FCStone Financial in San Francisco said he was part of that domestic flight to U.S. debt.

"Rates have been at zero for 10 years now so I was not really paying attention to my cash balance and I was not opening CDs, or money market funds," Deluard said.

"Why bother to call the bank? To get 25 basis points? But I can get close to 3 percent on a 2-year note, with low duration risk," he added.

This arbitrage on cash-like instruments from individual investors has supported the short-end of the curve.

That said, Deluard noted that over the longer term, this re-allocation from brokerage or savings accounts is hampered by the fact that cash balances are at historically low levels.

Cash accounted for 30.5 percent of households' financial assets in September, the lowest share since September 2007, according to the Federal Reserve's flow of funds data.

The more promising source of retail inflow would be a reduction in equity allocation, currently estimated at 52 percent, a 20-year peak.

Reversing that stock market allocation would free about $4 trillion in savings that could possibly go into the Treasury market, Deluard said.


Annual U.S. Treasury supply has nearly doubled since 2015. At the end of 2018, Treasury supply totaled $1.36 trillion from about $688 billion in 2015, according to Fed and Morgan Stanley data.

Individuals purchased about $700 billion of that supply in 2018, with holdings of nearly $2 trillion, a record high, according to figures from Securities Industry and Financial Markets Association. Individuals were the largest buyers of Treasuries last year, SIFMA data showed.

Matthew Hornbach, global head of interest rate strategy at Morgan Stanley in New York, believes U.S. investors, including individuals, are going to be the number one buyer in 2019.

"From the three-month bill to 10-year Treasuries, yields today are much higher than they were on average throughout the course of the financial crisis," he said in a video blog in December.

Hornbach also pointed to the yield advantage of two-year Treasuries, currently at 2.4 percent, over the estimated S&P 500 dividend yield of 1.9 percent.

"We have a situation wherein Treasuries are pretty attractive for people who are interested in fixed income."

© 2024 Thomson/Reuters. All rights reserved.

U.S. mom-and-pop investors, the largest buyers of Treasuries last year, are likely to once again drive the flight to American government debt this year
investors, bond, treasuries, yield
Thursday, 21 March 2019 02:34 PM
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