The cheapest dollars in years are spurring a rise in foreign investment in U.S. government bonds at the same time that pension funds are boosting their holdings—and that demand pickup could weigh on Treasury rates even as the economy strengthens.
The WSJ Dollar Index, which measures the greenback against a basket of currencies, is down 2.9% this quarter so far and hovering close to the lowest level in about five months. The price of hedging dollars through forward rates also was the cheapest in at least six years last week and remains close by, according to analysis from Deutsche Bank.
“If I were to buy a bond market, which is the case for a lot of investors, I would buy the U.S. Treasury,” said Laurent Crosnier, chief investment officer of Amundi’s London branch, Europe’s largest asset manager. The positive yield and low hedging cost “makes the U.S. Treasury attractive relative to others.”
The benchmark 10-year government bond yield slipped below 1.5% earlier this week, closing at 1.458% on Thursday—the lowest level since March 2. Prices rise when yields fall.
Government bonds are popular in times of poorer economic performance for safety and liquidity. The recovery from the pandemic is widely expected to result in fund managers cutting their holdings as they position their portfolios for better times and less uncertainty. Investors are widely expecting an increase in inflation from a combination of pent-up demand, supply constraints and stimulus spending. This is also seen as negative for conventional bonds, whose fixed cash flows lose purchasing power when prices rise.