Foreign investors dumped U.S. Treasury debt in September for the first time since May 2021, but it’s possible these sellers are already regretting it, according to one prominent Wall Street economist.
The latest installment of the Treasury Department’s monthly reports on buying and selling of U.S. securities by foreign investors — by both central banks and other official parties and private institutions and individuals — showed they sold $1.7 billion in Treasurys on a net basis. That marked the first time foreign investors were net sellers instead of net buyers in more than two years.
David Rosenberg, the founder of Rosenberg Research and a former Merrill Lynch economist, scoffed at this in a note to clients.
“I have to say that in the irony of ironies and a clear case of poor timing, foreign investors sold a net $1.7 billion of Treasury securities in September (according to yesterday’s TICS data) in the first net outflow since May 2021,” Rosenberg said in emailed commentary.
Rosenberg added that this capped off the weakest period for foreign demand for Treasurys since May 2020.
Ultimately, foreign sellers might regret their decision, Rosenberg said. That is because the short squeeze in Treasurys that began when Pershing Square Capital Management founder Bill Ackman revealed that his firm had closed out its bet against 30-year Treasury bonds likely isn’t over yet.
See: Bill Ackman cashes out bet against Treasury bonds as yields hit 16-year highs
“This acts as a powerful source of buying power for boring bonds,” Rosenberg said.
Since the end of September, the net speculative short position in 10-year Treasury note options and futures contracts has been reduced by about 20%, according to data from the Commodity Futures Trading Commission cited by Rosenberg, but there is still a large net short position outstanding.
Foreign buyers backing away from Treasurys isn’t exactly a new phenomenon, as The Wall Street Journal has reported.
Data collected by the U.S. Securities Industry and Financial Markets Association shows foreign ownership of Treasurys has sunk to around 30%, down from more than 40% a decade ago.
Still, it is difficult to gauge the exact degree to which foreign buyers, long key players in the $26 trillion market for Treasury bonds, have backed away.
Flows reported by the Treasury only recover trades using custodians based in the U.S. Furthermore, China and others sometimes use intermediaries based in Belgium or the Cayman Islands, making it difficult to tell exactly how much they have been buying or selling.
See: Reports that China has been dumping Treasury bonds have been greatly exaggerated
And even though they sold Treasury bonds, foreign entities continued to buy agency bonds, a category that includes mortgage-backed securities, in September.
Treasury yields have fallen substantially since hitting their highest levels in 16 years last month. The yield on the 10-year Treasury note
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is down by nearly 60 basis points since its intraday peak from Oct. 23, according to FactSet.
