Unstable Dollar Makes US Bonds Unprofitable For Foreign Investors
Expectations of higher interest rates in the US and the ambitious program of President Donald Trump increased the gap between the yields of US Treasury bonds and the Eurozone counterparts to the highest level in recent years. Increasing rates in the US will only further widen the gap in short-term rates between the United States and Europe, which has already reached 30-year highs.
It is expected, that the Fed will raise interest rates at least three times this year, while its central bank counterparts in Europe and Japan are still far from raising rates from record lows. Last week, the yield of two-year US Treasury bonds reached 2.27%, which is the highest for 9-1/2 year.
Data from fund-tracker EPFR Global showed that the average weekly purchases of US bonds by non-US investors declined by almost a third to $9 billion this month compared to more than $13 billion in 2017. A Barclays bond index, which measures the total returns for US Treasury bonds in euro terms, has already fallen by 4% this year after falling by 10% last year, which indicates that the purchase of US bonds by European investors is unprofitable.
One of the reasons for this decline is the cost of hedging, which in recent months has risen sharply and almost destroyed the advantage that US bonds offer. Another headache for foreign investors was the dollar. After it fell by more than 10.5% in 2017, this year it lost another 2.4%. The US dollar remains unstable against the world's major currencies, and it begins to deter some existing and potential international lenders in the US Treasury. Despite yields on US government debt are at their highest in over four years, they are failing to attract many European investors due to the uncertain forecast for the dollar and the prohibitive cost of hedging their currency risks.