European financial institutions are increasingly reassessing risks associated with U.S. government debt. Treasury yields remain near multi-year highs and U.S. federal debt has surpassed 40 trillion U.S. dollars. The benchmark 10-year U.S. Treasury yield hovered around 5 percent on Friday after hitting its highest level since 2007 earlier in the week. This development has led some European investors to reduce exposure to U.S. government bonds.
Despite the Federal Reserve's first interest rate hike in more than three years and the U.S. Treasury's expanded buybacks of longer-dated securities, long-term borrowing costs have remained elevated. Some European investors have moved to reduce exposure to U.S. government bonds, while others have raised concerns over the country's fiscal outlook and the traditional perception of Treasuries as virtually risk-free assets.
Norges Bank Investment Management (NBIM), which manages Norway's sovereign wealth fund, proposed earlier this month reducing the share of government bonds in the fund's fixed-income benchmark to 50 percent from 70 percent. The proposal includes increasing exposure to non-government debt, such as mortgage-backed securities. Under the proposal, the weighting of U.S. government bonds in the benchmark would fall to 21.9 percent from 34.1 percent.
Other European asset managers have also adjusted their positioning toward U.S. government debt. Swisscanto Asset Management said in its September asset allocation update that interventions by the U.S. Treasury in bond and currency markets had unsettled investors. The Swiss asset manager said it was reducing exposure to long-dated U.S. Treasuries after the 30-year yield broke above its previous trading range.
British private bank and wealth manager Brown Shipley has maintained a tactical underweight position in U.S. Treasuries, citing higher energy prices, elevated government borrowing, and persistent geopolitical uncertainty. The institution noted that an expansion of U.S. Treasury buybacks of longer-dated debt could provide some technical support to bond prices but would not address underlying fiscal concerns.
The debate has also extended to the traditional status of government bonds as safe assets. James Turner, head of global fixed income for Europe, the Middle East, and Africa for BlackRock, recently noted that government bonds were "not as risk-free as they used to be." He highlighted that a company with a fiscal position comparable to that of the U.S. government would be unlikely to be regarded by investors as risk-free.
Kristina Hooper, chief market strategist at London-based global investment manager Man Group, has identified reduced exposure to U.S. Treasuries among the market trends to watch this autumn. She noted that uncertainty surrounding U.S. policy was contributing to unease among international investors. BNP Paribas Wealth Management maintained a 12-month target of 4.50 percent for the 10-year Treasury yield, while saying yields could temporarily approach 5 percent in the coming months.
Key points
- European investors reassess risks associated with U.S. government debt
- Some investors reduce exposure to U.S. government bonds due to fiscal concerns
- Traditional status of government bonds as safe assets is being questioned
