The Impact of Foreign Demand on the U.S. Bond Market


James Bernard, CFA, Managing Director, Fixed Income

Currently, nearly 71% of worldwide government issued bonds trade at yields of under 1% and approximately 33% of worldwide government issued bonds trade at negative interest rates.

Government bonds with low or negative yields

Source: Bloomberg, J.P. Morgan Asset Management; (Right) BofA/Merrill Lynch. *Target policy rates for Japan are estimated using EuroYen 3m futures contracts less a risk premium of 6bps. Government bond index is the BofAML Global Government Bond Index, which includes investment-grade sovereign debt denominated in the issuer’s own domestic currency. The index includes all Euro members, the U.S., Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden. Guide to the Markets – U.S. Data are as of August 31, 2016.

With this backdrop, the U.S. bond market looks attractive to foreign investors, and has seen significant demand from non U.S. buyers in recent years. We expect this trend to continue and possibly accelerate. Many foreign buyers are not only attracted to our modestly higher relative interest rates but also may find investing their funds in our currency to be appealing.

Source: FactSet, J.P. Morgan Asset Management; (Bottom left) U.S. Treasury. *Rolling six-month correlation of weekly change in yield. Guide to the Markets – U.S. Data are as of August 31, 2016.

The effect of this buying certainly has held down our interest rates, flattened our yield curves, and reduced credit spreads on many of our corporate issued bonds. In addition, many foreign buyers are finding our very developed and mature mortgage backed securities markets to also be relatively appealing to them. The net effect of this foreign demand, added to our own demand for yield, has driven credit default spreads (the premium an investor pays for credit protection/insurance) down close to their all-time lows. Mortgage backed securities and government agency bonds also trade at or near historically low yields when measured on an option adjusted basis.

As the FED continues to seek out a “goldilocks domestic economy” (enough economic growth to satisfy them, with some, but not too much, inflation, and full employment, but not too tight of a labor market) – they continue to find excuses to not raise interest rates. While we still expect some modest increases in rates in coming years, with the current length of this economic recovery (almost 7 years) one could argue that an economic slowdown in the next few years is also likely. If this were to occur the FED could again be under pressure to stimulate economic activity, which could possibly include lowering interest rates once again. In other words, get used to things, we may not be going anywhere meaningfully on rates anytime soon.

Jim Bernard, CFA, is the Managing Director, Fixed Income at Ancora Advisors LLC a SEC Registered Investment Advisor. He is also a Registered Representative and Registered Principal of Safeguard Securities, Inc. (Member, FINRA/SIPC)

The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.

Ancora Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management, and practices are contained in its “Firm Brochure” Form ADV, Part 2a. A copy of this form may be received by contacting the company at: 6060 Parkland Blvd, Suite 200, Cleveland, Ohio 44124, Phone: 216-825-4000, or by visiting our website

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