The number of foreign buyers of Treasuries that hedge their bond currency exposure is unknown, which makes it difficult to assess how much hedging costs may impact demand. While hedging costs certainly play a role, especially for larger institutional investors, other investors may simply choose not to hedge currency movement either due to cost, size of transaction, or perhaps because they believe that currency fluctuations can help with diversification.
CONCLUSION
Historic monetary stimulus from central banks has left government bond yields for many developed nations in negative territory, and corporate bond purchase programs from the European Central Bank and Bank of England have led to declining yields on other high-quality bond options, leaving foreign investors with few options for attractive yields on low-risk assets. Extraordinary policy moves by overseas central banks appear unlikely to reverse soon and may continue to provide ongoing support to bond prices.
Increasing hedging costs and lower Treasury yields may be a headwind for foreign demand going forward, though a lack of data showing the proportion of buyers who hedge makes it difficult to determine the impact. Other indicators, including demand from indirect bidders at Treasury auctions and the (less timely) TIC report continue to show that foreign demand remains supportive of Treasury strength, at least for now.
Anthony Valeri is fixed-income and investment strategist for LPL Financial.