Foreign central bank buying of corporates has hit a record high and fixed-income officials see the moves as a signal of the small but growing threat to Treasuries as the natural home for deep-pocketed central bank investors. They bought more corporates than ever before in November, according to the latest Treasury International Capital data, which came out last week. This comes hot on the heels of central banks picking up participation in other assets such as mortgage-backed securities (BW, 12/13).
The TIC report shows foreign central banks bought $1.8 billion of corporate bonds for the month, marking the fourth time in nine months spending exceeded $1 billion. In 2003, no month saw purchases greater than $1 billion. Sean Callow, currency strategist at IDEAglobal, said corporates could be stealing the thunder from Treasuries. "There's a growing trend for central banks around the world to be more active in managing their reserves to look for extra yield," he said.
To be sure, corporates still represent a small percentage of foreign central bank purchases of U.S. fixed-income assets, and the majority are in high investment-grade bonds. "[Central banks] have to explain to their governments why they're investing in riskier assets," Callow explained.
It is unclear how the increased participation will precisely affect spreads. "With such a run-up in reserves invested in Treasuries, you'd expect a modest diversification, and their reserves are so large even a modest change would be significant to the bond market," explained David Goldman, head of debt research at Banc of America Securities. That being said, spreads in November did not register an impact from the record buying.
However, other market participants do not see the high mark as being a significant threat to Treasuries. "Even a $1.8 billion swing from Treasuries to corporates is not going to affect yields of the 10-year," according to Bill Prophet, interest-rate strategist at UBS, noting that overall foreign central bank spending totaled $21 billion for November. Despite the fact last week's report caused a buzz in the Treasury market, Prophet said it would take foreign central bank buying of $15 billion to have an impact on 10-year yields.
