Foreign investors have recently sold off U.S. Treasury debt, a move that could be regrettable, according to David Rosenberg, a prominent Wall Street economist. The Treasury Department’s monthly reports revealed that these investors sold $1.7 billion in Treasurys on a net basis, making them net sellers for the first time in over two years.
Rosenberg, the founder of Rosenberg Research and a former Merrill Lynch economist, expressed skepticism towards this decision in a note to clients. He highlighted the irony in the timing of this sell-off, as it coincided with the first net outflow since May 2021. Additionally, he noted that this period marked the weakest foreign demand for Treasurys since May 2020.
However, despite their current gains, foreign sellers may soon realize their mistake. Rosenberg believes that the ongoing short squeeze in the Treasury market, triggered by Bill Ackman’s revelation that his firm closed its bet against 30-year Treasury bonds, has not yet run its course. As a result, there is still substantial buying power in the market for bonds.
It remains to be seen whether these foreign investors will ultimately regret their decision as the situation unfolds. However, their recent sell-off may prove ill-timed as the potential for further gains in Treasury bonds persists.
See: Bill Ackman cashes out bet against Treasury bonds as yields hit 16-year highs
Foreign Buyers Reduce Speculative Short Position in Treasury Bonds
Data from the Commodity Futures Trading Commission reveals that the net speculative short position in 10-year Treasury note options and futures contracts has been reduced by approximately 20% since the end of September. This reduction, however, has not completely eliminated the large net short position that remains outstanding.
Foreign buyers have been decreasing their investment in Treasurys, a trend that has been previously reported by The Wall Street Journal. According to the U.S. Securities Industry and Financial Markets Association, foreign ownership of Treasurys now stands at around 30%, a significant decline from the 40% ownership recorded a decade ago.
The exact extent of this reduction in foreign buyers’ involvement in the $26 trillion Treasury bond market is difficult to determine. Data provided by the Treasury only captures trades conducted through U.S.-based custodians. Additionally, countries like China often utilize intermediaries based in Belgium or the Cayman Islands, making it challenging to accurately assess their buying and selling activities.
It is important to note that while foreign entities have been selling Treasury bonds, they have continued to purchase agency bonds, including mortgage-backed securities, during the month of September.
The recent decline in Treasury yields is noteworthy. After reaching their highest levels in 16 years last month, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) has dropped by almost 60 basis points since its peak on October 23, according to FactSet data.
See: Reports exaggerating China’s sale of Treasury bonds