US bonds

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At last, some respite for the beleaguered US Treasuries market. On the eve of the Group of Eight finance ministers’ meeting this weekend, Kaoru Yosano, Japan’s finance minister, said his faith in US government bonds was “absolutely unshakeable”. The market reaction was swift. Yields on the benchmark 10-year bond fell some 6 basis points to 3.8 per cent.

Given that Japan is the world’s second biggest owner of Treasuries, Mr Yosano may have been talking his own book. Still, it was a happy coda to a difficult week for US debt markets. At one 10-year auction this week, Treasury yields rose to 3.99 per cent, their highest this year.

Given that the US may have to issue some $3,250bn of bonds this year, this increased worries that the US could face a buyers’ strike, especially by foreign central banks, among its biggest purchasers.

Such fears, while perennial, look overblown. It is true that all investors, including foreign central banks, are demanding higher yields. Given the rising risk of inflation, that is only reasonable. Yet there is precious little sign that foreign demand is drying up. After all, at last week’s scary bond sale, “indirect bidders”, a category that includes foreign central banks, still bought 34 per cent of the notes, compared with 23 per cent during the past five auctions.

Among the Treasury market’s big buyers, China, Russia and Brazil regularly huff and puff about the dominance of the US dollar. As part of plans to diversify their foreign currency holdings, they have said that they will contribute some $100bn to a planned $500bn International Monetary Fund bond issue. Even so, with $2,500bn of combined foreign reserves between them, there is nowhere other than the world’s most liquid bond market for them to put their money. The US dollar’s position as the world’s reserve currency “isn’t under threat”, as Mr Yosano said. That is true, for now.

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