Where to Find Treasury Buyers? Not Asia

Asian investors are proving less and less eager to buy U.S. government bonds, even as the Treasury Department prepares to sell $1.3 trillion of new debt in the new fiscal year.

Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of this calendar year, according to the Treasury. That is just over half of what they bought in the same period last year.

Holdings have particularly stagnated in a number of emerging Asian economies—including South Korea, Singapore, Thailand and Taiwan—which have prized U.S. government debt as a capital bulwark since the 1997 Asian currency crisis.

Many observers assume the U.S. has no trouble finding demand for its debt in the vast pool of world-wide governments, financial institutions, mutual funds and individual investors who want to own the world’s major risk-free asset. Yet the Treasury is finding fewer buyers in some parts of the world, leaving domestic investors such as mutual funds to pick up the slack.

Much of the drop-off in demand among investors in Europe and Japan is due to the increased cost of protecting themselves from the currency risk of buying dollar-denominated debt. For emerging Asian economies, the reasons are different: Stagnant trade flows and strong reserve balances have sapped their demand for U.S. government debt, according to analysts.

The erosion of demand in these emerging markets also reflects their maturation into more stable economies where investors have a greater array of domestic investments in which to place their money.

“They don’t need to build any more buffers,” said Tim Alt, who manages currencies and bonds with U.K.-based Aviva Investors. They “have an alternative where you don’t have to recycle everything into U.S. Treasurys.”

The lack of demand doesn’t reflect a critique of U.S. fiscal policy but is more likely an indirect byproduct of U.S. trade tensions with China, according to Torsten Sløk, chief international economist at Deutsche Bank Securities. China is the world’s second-largest economy and the region’s largest trading partner for many countries, so weakness in its currency, the yuan, also has weighed down the currencies of many of its neighbors. In other circumstances, these countries could harbor more demand for U.S. debt, but currently lack a compelling need to buy it, he said.

The Treasury data could understate demand from private investors in Asia, such as insurance companies, because they often make purchases through intermediaries in other countries, according to Brad Setser, an economist at the Council on Foreign Relations. However the most important detail about demand from the region is the lack of intervention by central banks, he said.

Since the start of June, when the U.S. first imposed tariffs on China, Korea’s currency, the won, has dropped 3.6% against the dollar, while the Singapore dollar has declined 2.7%, Thailand’s baht has fallen 2.4% and the Taiwan dollar has slipped 2.3%. Those moves compare with a 7.3% loss in China’s yuan.

The declines in Asian emerging markets’ currencies have helped their exports remain competitive versus China, but they also have reduced the need for them to buy Treasurys—a popular way for central banks to weaken their currencies against the dollar, Mr. Sløk said.

While it is unclear whether the reduction of Treasury purchases is a deliberate decision or simply free markets at work, the lack of demand shows trade tensions between the U.S. and China  have been “spilling over” into the rest of Asia, Mr. Sløk said.

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Write to Daniel Kruger at [email protected]

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