Entering 1.4% Range After 3 Months
Foreign Investors Including Japan Focus on US Treasury Purchases
Expansion of Purchases Using Dollar Weakness
Attention on Fed Rate Hike Delay Expectations
[Asia Economy New York=Special Correspondent Baek Jong-min] The yield on the U.S. 10-year Treasury note has fallen to the 1.4% range. Despite concerns that the May Consumer Price Index (CPI) announcement scheduled for the 10th could accelerate the U.S. Federal Reserve's interest rate hikes, demand for Treasury purchases has continued, taking advantage of the weak dollar. The market is analyzing that the decline in U.S. Treasury yields reflects the Federal Reserve's possibility of maintaining long-term zero interest rates.
On the 9th (local time), the yield on the U.S. 10-year Treasury note fell intraday to 1.47%, marking the lowest level in three months. This is the exact opposite phenomenon compared to the situation where the 10-year Treasury yield rose from 0.9% at the end of last year to 1.7% this year, fueling fears of rising interest rates.
The $38 billion auction of 10-year U.S. Treasuries held that day attracted bidding demand at 2.58 times the average, which is analyzed as the highest demand since July last year. As demand surged, the sale yield dropped nearly 1 percentage point to 1.497% compared to 1.684% at the previous auction on May 12. A decline in Treasury yields means a rise in Treasury prices. This exemplifies that buying pressure currently outweighs selling pressure in the Treasury market, reflecting inflation concerns.
The economic media TheStreet.com even described the decline in U.S. Treasury yields amid spreading inflation concerns as a "mystery."
The Wall Street Journal reported that several factors have driven the rise in Treasury prices. In particular, as the dollar weakened following the U.S.'s large-scale infrastructure investment plans, overseas investors such as Japan stepped up their purchases of U.S. Treasuries. It is analyzed that they took advantage of the dollar's decline as an opportunity to buy U.S. Treasuries.
According to NatWest, the Federal Reserve's holdings of U.S. Treasuries on behalf of foreign central banks have increased by $40 billion this year. Japan, a major buyer of U.S. Treasuries, purchased $19 billion worth of U.S. Treasuries in the first quarter alone.
U.S. Treasury yields widened their decline after the May employment data released last week by the Department of Labor was assessed as insufficient to prompt the Federal Reserve's asset purchase tapering. Especially after U.S. Treasury Secretary Janet Yellen stated that "a slight increase in interest rates is positive for the U.S.," supporting rate hikes, Treasury prices continued to rise.
In this regard, analysis is spreading that the CPI to be announced on the 10th is unlikely to trigger tapering or rate hikes. Dow Jones forecasts that the May CPI increase rate will reach 4.7%, significantly exceeding April's 4.2%.
Morgan Stanley predicted that concerns about inflation rising beyond control are excessive and that the consumption expansion caused by COVID-19 could soon disappear. They analyze that price increases are leading to reduced demand.
Capital Economics also reported that the decline in Treasury yields reflects expectations that even if the May CPI records the highest level in 28 years, long-term inflation concerns are not significant.
MarketWatch also understands that bond investors are buying bonds, expecting that despite the May CPI increase, Federal Open Market Committee (FOMC) members at the meeting on the 15th-16th will express views that inflation is temporary and that zero interest rates will be maintained for a long time.
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