On a day where yields on 10- and 30-year Treasuries surged to multi-year highs, Bill Gross sees dimming demand from foreign investors adding to the pain.
His comments come at a particularly tough times for bond bulls. The yield on benchmark 10-year Treasuries reached about 3.16 percent Wednesday, the highest since 2011, amid gains in stocks and strong economic data. Thirty-year yields touched around 3.32 percent, the highest since 2014.
“Euroland, Japanese previous buyers of 10yr Treasuries have been priced out of market due to changes in hedge costs,” Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, tweeted Wednesday. “For insurance companies in Germany/Japan for instance, U.S. Treasuries yield only -.10%/-.01%.”
Gross is referring to the falling cross-currency basis, which has driven U.S. 10-year yields to minus 0.06 percent for European investors and 0.09 percent for Japanese buyers who hedge against currency fluctuations through swaps, data compiled by Bloomberg show. That compares to 0.47 percent for 10-year German bunds and 0.13 percent for similarly dated Japanese government debt.
At the heart of this phenomenon is the swelling cost to convert payments from euro and yen into dollars. For a euro-based buyer of Treasuries, the cost to hedge would entail paying the three-month London interbank offered rate for dollars (currently about 2.41 percent), receiving their local Libor (minus 0.35 percent) and the basis (0.39 percent). As the three-month cross-currency basis blows out, that hedge becomes more expensive.
The carnage may not end here, according to Gross.
“Lack of foreign buying at these levels likely leading to lower Treasury prices,” he tweeted.
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