Market Extra: Here’s why investors are eager for clues about foreign demand for Treasurys

Bond traders are questioning whether foreign demand for U.S. Treasurys will remain robust for the rest of the year, underlining concerns about an important backstop that has helped to keep a lid on yields.

Investors will pay close attention to the release Monday of the Treasury International Capital, or TIC, report for February, with analysts looking “for any evidence that overseas investors have shied away from Treasurys as a result of the growing global trade tensions,” said Ian Lyngen and Aaron Kohli, fixed-income strategists at BMO Capital Markets.

Treasury yields rose to multiyear highs in February after fears of wage inflation sent bond prices lower, with the 10-year Treasury note yield hitting 2.95%, more than a four-year high. But they fell back as the stock market saw an early-February volatility flare-up and fresh tariffs were imposed by President Donald Trump on imported washing machines and solar panels, drawing investors into haven assets like government bonds. Yields and debt prices move in opposite directions.

See: Here’s what worries bond-market investors more than inflation right now

Such trade jitters have lingered as Trump periodically beats the drum for the U.S. to follow a more protectionist stance. A trade spat between the U.S. and China has spilled over into renewed charges of currency manipulation, with President Donald Trump tweeting on Monday that China and Russia were “playing the Currency Devaluation game.”

Some economist suspect central banks for some countries with large trade surpluses may have temporarily stopped accumulating Treasurys in order to avoid being labeled a currency manipulator by the U.S.

Read: Foreign investors cut appetite for Treasurys as U.S. set to flog record level of debt

In last week’s round of Treasury auctions, indirect buyers, a category viewed as a proxy for foreign demand, were noticeably absent. This was particularly acute in the auction of 10-year notes TMUBMUSD10Y, +0.16% after the indirect bids accepted fell to 53.2%, the smallest share since November 2016. On the day of the sale, the 10-year Treasury note yield hit an intraday low of 2.76%.

It’s not just Wall Street that is anxious. The federal government appears to have taken notice that foreign demand could be dissipating at a time when it will issue a record amount of debt and the Federal Reserve has started to reduce its balance sheet bloated from crisis-era policies.

The Treasury Department’s quarterly refunding survey of primary dealers, who trade directly with the government and the Federal Reserve, last Friday asked if foreign demand would be affected in the near-future and whether there were patterns around foreign investors inflows that might bear a closer look.

Analysts said the question had not been asked in recent history, but was not surprising as the refunding survey is used to assess the landscape on the appetite for Treasurys.

“Every quarter, they ask about supply and demand dynamics, so this is an evolution of that. In the last six months, we’ve had threats from foreign entities to stop buying Treasurys, it’s definitely a concern as foreigners own a very significant portion of the market,” said Thomas Simons, senior money market economist at Jefferies.

Also check out: Falling foreign demand for Treasurys puts bondholders in ‘vulnerable’ position

Whenever questions about overseas demand for U.S. government paper have cropped up, Treasury Secretary Steven Mnuchin has shown no sign of trepidation. “There are lots of buyers around the world for U.S. debt,” he said in an interview with CNBC on April 6, reiterating that overseas investors would flock to the U.S. market for highly liquid and creditworthy assets.

Some investors say fears over abating foreign appetite were overblown as geopolitical jitters have muddied the picture for recent demand. The potential for a Syrian conflict and hostilities between Moscow and Washington have drawn spurts of haven-related buying, sometimes pushing yields to relatively expensive levels.

That, however, may have put off opportunistic overseas buyers looking for a bargain and contributing to the lackluster 10-year note auction results seen last week.

Stephen Zeng of Deutsche Bank notes that looking at other data paints a more optimistic outlook. He said the Fed’s allotment data, another way to track overseas appetite for U.S. investments, showed foreign buyers had snapped up $16 billion of 10-year notes in the first three months of the year.

That came as custody holdings of Treasurys by the New York Federal Reserve climbed $77.7 billion this year, a sign that reserve managers for foreign central banks have carried out opportunistic buying after yields reached multiyear highs at the start of 2018. Around $12.6 billion of that overall sum was accrued in the week ending April 11.

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