Analysts worry about demand for US Treasuries
US budget deficit is already widening and will grow even more, as lawmakers push for a second stimulus package to curb the effects of the coronavirus pandemic.
Additional financing costs should be associated with issuing more US Treasuries — but this raises the question of who will buy them. The current situation is taking place against the backdrop of new geopolitical events. China, formerly the main buyer of the aforementioned bonds, is now cutting its holdings, analysts say.
«While the American economy is gradually recovering, the costs of fighting the pandemic are still piling up», – writes Kristjan Mi, Research and Analytics Strategist at Asset manager Schroders.
If Congress approves another set of measures, coupled with lower tax revenues, the deficit will be around 20% of the country’s GDP, Mee said..
«Looking ahead, the Treasury expects emissions to remain high and the timing depends on the adoption of the next incentive program. Then the key question is who will finance the costly emissions associated with a very large budget deficit.», – he added.
US debt has risen to levels not seen since the end of World War II, Reuters reports.
China was previously the largest holder of US Treasuries, but it is gradually dumping these assets amid growing tensions between the two countries. Chinese assets of these bonds went to second place in June last year, losing to Japan.
«Private foreign investors continue to buy Treasury bonds, but this is not enough to offset weak demand from official institutions», – said Mi.
U.S.-China relations deteriorate amid trade. Mutual accusations of the coronavirus pandemic, as well as the technological war, also negatively affected.
As a result, according to industry observers, China will want to reduce its dependence on the dollar by diversifying its foreign exchange reserves into other currencies.
«The political aspect is an important factor. It is likely that China does not want an increase in dollar reserves due to a severe deterioration in relations with the issuing country», – said Alan Raskin, Deutsche Bank strategist.
China more than triples purchases of Japanese government bonds between April and July, reaching the highest level in three years.
Raskin also noted that now the situation is different from what it was several years ago.. Rise in price in 2014 yuan affected China’s competitiveness as a stronger currency makes Chinese goods more expensive to export and the country earns less on falling demand.
As a result, the decline in income marked the limitation of the growth of reserves, and subsequently a reduction in the purchase of US Treasury bonds by China, Raskin said..
The most likely buyers of bonds are a number of Asian countries with significant foreign exchange reserves, as well as interventions in the market, experts say..
They celebrate the reserves of countries like Taiwan and Singapore that have increased markedly since March..
«Perhaps, ironically, further dollar weakness could prompt central banks (emerging markets) to increase their Treasury holdings as their regulators often buy dollars to prevent their national currencies from appreciating too much.», – said Mi.
Many emerging market countries are exporters. Their exports will no longer be as attractive if their currencies become too strong. Buying dollars, they increase demand, strengthening the dollar and comparatively weakening emerging currencies.
Fed also may have to step in to buy Treasuries on a much larger scale than usual.