[TOKYO/SINGAPORE] As the Trump administration’s “big, beautiful bill” grinds its way through the US Senate, incentives are growing for foreign investors to diversify out of US Treasuries losing sheen from prospects of deficit spending and inflation-boosting tariffs.
President Donald Trump’s sweeping tax cut and spending measure will boost US debt by US$3.3 trillion, the nonpartisan Congressional Budget Office estimates, while runaway deficits and swelling debt led Moody’s to cut its credit rating in May.
“Definitely I’m concerned about the fiscal deficit expansion,” said Toshinobu Chiba, a Tokyo-based rates and credit fund manager for Simplex Asset Management.
Chiba said he has been using futures to shift away from Treasuries and into European debt, but aims to move that trade to the cash bond market when Trump’s “big, beautiful bill” passes and inflation expectations tick upwards.
“I think the first options should be Europe, especially the bunds and French bonds, and also Australia and Singapore are options for global investors.”
Traditionally a refuge for markets, Treasuries have been volatile since April, becoming less attractive for overseas investors as Trump’s erratic policies on tariffs and taxes drove them to pare exposure to the US dollar and US markets.
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US Treasury International Capital (TIC) data shows foreign money leaving US short and long-term debt and banking flows stood at a net US$14.2 billion in April, the same month that Trump rattled global markets with his “Liberation Day” tariffs.
The US national debt has increased fourfold in less than 10 years to some US$36 trillion, with about US$29 trillion held publicly.
Japan is the biggest external holder of Treasuries with US$1.13 trillion, followed by Britain with US$807.7 billion and China with US$757.2 billion, TIC data shows.
Treasuries fell in the aftermath of the tariff news, with benchmark 10-year yields reaching as high as 4.629 per cent on May 22 before settling down to about 4.277 per cent. Treasury 10-year yields have swung between 3.9 per cent and 4.629 per cent since April.
Passage of Trump’s long-simmering bill would give investors another reason to fret about the state of US finances.
Senators debating the measure in a marathon weekend session were expected to pass it late on Monday and in the Asian trading day on Tuesday.
Senate Republicans are set on using an alternative calculation method for the bill’s cost that does not factor in extending the 2017 tax cuts and seems to save US$500 billion, according to an analysis by the Bipartisan Policy Center.
Prospects for even wider deficits in the US may compel European investors to dump Treasuries and bring their money home, said Gustavo Medeiros, London-based global head of research at emerging markets investment manager Ashmore Group.
When Treasuries and other major bond markets sold off in April, the Bund market held firm.
Though the amount of German debt is also growing after the new government’s trillion euro defence and infrastructure spending push, Europe’s biggest economy is the only G7 member with a debt-to-GDP ratio below 100 per cent, bolstering its safe-haven credentials.
“That not only creates an upward, better opportunity for the equity markets, but it also is going to increase the issuance of risk-free German bunds and pan-European debt,” Medeiros said.
“So you’re going to have a lot of incentive for capital to come back.”
Yet a widespread sell-off is unlikely, despite fiscal concerns over Trump’s spending bill that are expected to steepen the Treasury yield curve as investors demand higher returns to hold US debt for longer, said analyst Masahiko Loo.
“The reduction in foreign US Treasury holdings has been a long-term structural trend rather than a sudden exodus,” said Loo, a senior fixed income strategist at State Street.
“It is a ‘diversification, not divestment’ story with foreign investors, particularly in Asia.”
Hemant Mishr, group CIO of SCUBE Capital, is also betting on a steeper Treasury curve.
“The markets are worried and US risk premiums will further widen,” he said. “We expect US credit default swaps to continue quoting at a substantial premium to similarly rated sovereigns.” REUTERS
