Foreign investors scale back Treasury holdings

By Emily Flitter

LONDON (BestGrowthStock) – Foreign investors have begun cutting their holdings of Treasuries, and the inclination to shed the low-yielding assets is likely to grow as risk appetite improves and managers seek better returns elsewhere.

Treasury yields hit six-month highs in a bout of selling that followed a government deal on December 7 on two years’ worth of tax cuts. The deal brightened the U.S. growth picture but also focused attention on its fiscal problems.

Fund managers across Europe, Asia and the UK cut their fixed income holdings by 3.3 percentage points from October to November, and within that class trimmed their allocation of U.S. Treasuries by 1.4 percentage points, a recent poll by Reuters found.

A Bank of America/Merrill Lynch fund manager survey found managers were turning away from bonds in favor of riskier assets, and pointed to more enthusiasm for equities than for fixed income securities in the coming months.

The motive was simple: Yields are too low.

~Long story short, we did not believe Treasuries were appealing at these levels,” said Kevin Burrows, chief investment officer at Nedgroup Investments, a fund of funds manager in London.

Nedgroup halved its proportion of government bond holdings to total holdings from 60 percent to 30 percent. Treasuries make up the lion’s share of the government bond assets held by the funds in which Nedgroup invests.

It moved instead into high yield and emerging market bonds.

“It was a significant change that we made in August and it has worked pretty well for us,” Burrows said.

“It’s possible that we even revisit that decision and we may just remove the constraint that we have to hold a minimum amount in any particular global governments including U.S. Treasuries.”

OUT OF FASHION

Government bonds have fallen out of favor as evidence mounted that the economy might recover more quickly than previously expected.

The latest data from the Treasury Department on capital inflows, released on Wednesday, showed a net outflow of $17.4 billion of private capital in the month of October.

The government’s move to extend a series of tax cuts by two years, thus adding to the size of the budget deficit, has also tarnished Treasuries.

And the less-than-stellar results of the Federal Reserve’s attempts to lower long-term interest rates by embarking on the purchase of $600 billion in Treasuries has also put investors off the securities.

“I think the 20-year bond boom has run into the end of its phase,” said Chris Oulton, chief executive officer of Prime Rate Capital Management, a money market fund in London.

“It has certainly had an astonishingly good run and things are now looking quite fragile.”

Oulton said his fund does not buy government paper but picks up short-term paper from companies that are strategically important to their home governments.

“Why would we buy government bonds when we could buy financial paper yielding more that would be supported by the government?” he said.

“I don’t think there’s been an argument to buy Treasuries or government bonds from the G7 nations since those governments pledged to support their banking systems.”

Bettina Mueller, senior fund manager at DWS Investments in Frankfurt, said fund managers prevented by their mandates from selling Treasuries outright could make other changes.

“We lowered our duration position,” she said.

“If you can, probably, switch into other sovereign names in the portfolio. In U.S. dollars, you can by Finland or Sweden, for example, so if you think the country is in very good shape fundamentally I would buy those things.”

Bank of America-Merrill Lynch found in its latest fund manager survey, released on Tuesday, that investors had cut their exposure to bonds to the lowest level since April.

Respondents to the survey were a net 47 percent underweight in bonds versus 41 percent a month earlier, a number achieved by subtracting underweight positions from overweight ones.

BofA does not differentiate between bonds in its questionnaire, but said there was widespread negativity toward the asset class as a whole. The average position over the past nine years has been 33 percent underweight.

(Additional reporting by Jeremy Gaunt; Editing by John Stonestreet)

Foreign investors scale back Treasury holdings