The United States was one of the few nations to witness an outflow of foreign investment in governments bond in 2020, according to the Washington-based trade association for the global financial services industry. Greece and Italy were the other countries to experience overseas funds fleeing their debt instruments.
International investors looked to Germany and Japan to seek shelter when storm clouds formed in global financial markets at the height of the COVID-19 public health crisis.
When equities and other risky assets endure chaos, traders usually head to the $22 trillion Treasury bond market, sending yields lower. However, during the COVID-induced market meltdown in March 2020, the benchmark 10-year yield rallied.
“For a few scary days in early March 2020—at the height of the first COVID wave—U.S. Treasuries stopped trading like a safe haven asset, with 10-year yield shooting up as the S&P 500 was tumbling,” the report, issued in September, stated. “In subsequent weeks, it took $1.5 trillion in emergency quantitative easing (QE) by the Fed to stabilize the market, in what has now been written off as a market ‘plumbing’ episode.”
Are America’s Finances Being Scrutinized?
IIF analysts surmise that investors are becoming increasingly concerned about the unsustainable fiscal situation unfolding in the United States.When political gamesmanship is added to the equation, some analysts warn that greater volatility could seep into the bond market in the coming months.
With the U.S. central bank poised to trim its $120 billion-a-month bond-buying program sometime this year, some industry observers worry that the Federal Reserve’s pullback could trigger instability in a segment of the financial market famous for its liquidity.
The US Dollar Strength in 2021
Many market strategists had written off the U.S. dollar at the start of this year. But the greenback has been one of the top-performing currencies in global markets this year, even as the leading stock market indexes have posted multiple record highs. The U.S. Dollar Index, which measures the buck against a basket of currencies, has surged close to 5 percent year-to-date. The world’s leading international reserve currency has been lifted by many factors, including the bond yield surge and investors finding refuge from uncertainty amid the Delta variant and borrowing limit debate.Experts contend that concerns about growth and soaring energy prices could sustain the dollar’s ascent heading into 2022.
A New Class of Safe-Haven Assets?
Are German bunds and Japanese government bonds (JGBs) the new safe-haven assets in the international bond market? Even with their subzero yields, foreign inflows have been rising.It may all depend on what Fed Chairman Jerome Powell and the Federal Open Market Committee decide at their next policy meetings.