Chinese demand for Treasurys will slow for a second year, helping send yields higher in 2012, according to Bank of America Merrill Lynch.
China, America’s largest foreign creditor, won’t be alone as nations find that they have fewer dollars to funnel into U.S. debt, after increasing holdings to a record $5 trillion last year, according to Bank of America. Growth in world currency reserves was 13 percent in the third quarter of 2011 from 12 months earlier, versus as much as 30 percent in 2008, based on the latest figures from the International Monetary Fund.
Investors outside the U.S. have been loading up on Treasurys because of what Federal Reserve Chairman Ben S. Bernanke called the “global savings glut.”
Nations took in dollars as they exported goods and sold their currencies to fuel those shipments. Now current-account surpluses are declining, reducing the amount of dollars going into foreign coffers, according to Bank of America, which is one of the 21 companies that underwrite the U.S. debt.
The current account is a measure of money flowing into or out of a nation.
“In the past, China was exporting to everyone,” Bin Gao, head of rates research in Hong Kong for the Asia-Pacific region at Bank of America said in a March 2 interview. “China’s consumption is going to go up. It will export less and import more. Foreign reserves will continue to go up, but at a much slower pace.”
Flowing to Treasurys
Bernanke used the term “global savings glut” in 2005 when he was a Fed governor to describe the flow of funds into the U.S. Foreign investors joined Americans in seeking the relative safety of U.S. debt during the global economic recession of 2009 and the European debt crisis that developed in its aftermath.
Ten-year Treasury rates tumbled to a record low of 1.67 percent on Sept. 23.
Yields were unchanged from yesterday at 2.01 percent as of 10:18 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 changed hands at 99 7/8.
The rate will rise to 2.53 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. It would be the first yearly increase in yields since 2009.
Treasurys have handed investors a 0.5 percent loss in 2012, after climbing 9.8 percent last year, Bank of America data show.
China Reserves Decrease
China cut its Treasurys holdings by 12 percent to $1.15 trillion at the end of December from a peak of $1.31 trillion in July. The nation’s currency reserves dropped 2.8 percent between Oct. 31 and year-end. Its ownership of U.S. debt fell 0.7 percent in 2011, the first decline since at least 2001, according to Treasury data.
Last year’s $566.2 billion in total Treasury purchases from abroad was the least since 2007, the figures show.
Assuming U.S. investors such as banks, mutual funds, pension funds, insurance companies and households increase their purchases by $100 billion each in 2012 from 2011, foreigners will need to buy more than double the amount purchased last year to take up all the supply, Bank of America estimated in a Feb. 24 report.
If the Federal Reserve implements a third round of Treasury purchases as it strives to support the U.S. economy, foreign buying would still need to rise almost 85 percent, according to the report by Priya Misra, Shyam S. Rajan and Marcus Huie in New York.
Treasurys, Dollar Sold
Emerging-market central banks sold Treasurys last year to support weakening currencies.
Central banks in Russia, Turkey, Indonesia, India, South Korea, Brazil and Peru all sold dollars to stem declines in their currencies, according to central bankers and traders.
China allowed the yuan to strengthen 4.7 percent against the U.S. currency in 2011 and 3.6 percent in 2010, meaning it is easing its policy of buying dollars to limit gains in its currency.
Treasury investors shouldn’t be too quick to rule out foreign buyers, said Kei Katayama, who invests in U.S. bonds at Daiwa SB Investments Ltd., which oversees the equivalent of $60.8 billion, including Asia’s second-largest mutual fund.
“It may not be as large as a decade ago, but there is still plenty of foreign-reserve demand,” Katayama said. “China and other emerging-market countries are the main drivers of the global economy. In that sense, there will be a lot of trade.”
China’s current-account surplus was $201 billion at the end of last year, less than half the peak of 2008.
Japan, America’s largest overseas lender after China as it invests the dollars it bought last year to weaken its currency, had a current-account deficit of 437.3 billion yen ($5.36 billion) in January.
“China’s buying of Treasurys will continue to go up, but at a much slower pace,” Bank of America’s Gao said.
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