Treasury bonds are benefiting from a surge in domestic demand thanks to economic weakness and a surge in foreign demand thanks to the dollar’s weakness.
Foreign investors lifted their Treasury holdings to a record peak of $3.45 trillion in August, according to the latest Treasury Department data. The dollar’s decline makes foreigners’ Treasury purchases cheaper in their own currencies.
The buying surge comes despite the fact that Merrill Lynch’s Treasury Master Index dropped 4.46 percent from Dec. 31 to June 30, the worst first half on record.
The buoyant demand also stands in the face of a budget deficit that exploded to $1.4 trillion in the year ended Sept. 30 and is expected to keep rising.
The Merrill Lynch index has rebounded 1.46 percent since mid-year.
“The same yield is more attractive” to overseas investors because of the dollar’s slide, Todd White of RiverSource Investments tells Bloomberg.
Foreign investors also can trade bonds more easily here than in other countries.
“The U.S. continues to provide one of the deepest and most liquid markets available for investing,” Wan-Chong Kung of FAF Advisors tells Bloomberg.
As for domestic investors, with the U.S. economy still struggling, they see value in Treasuries.
The economy shrank 0.7 percent in the second quarter, and many experts expect the Federal Reserve to refrain from raising interest rates anytime soon.
"If we had three quarters of consecutive above trend growth, then you're talking (about a rate hike)," Goldman Sachs chief economist Jim O’Neill told CNBC.
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