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Report May Show Sea Change Toward Agencies

11 Mar 2005

A report coming out this week may confirm the growing view agency debentures are supplanting Treasuries in foreign investors' portfolios as they seek higher yields, which may point the way to higher government bond yields in the long run.

A report coming out this week may confirm the growing view agency debentures are supplanting Treasuries in foreign investors' portfolios as they seek higher yields, which may point the way to higher government bond yields in the long run. The Treasury International Capital System data for January, to be released this Tuesday, has gained importance among market participants as strong foreign buying last year is thought to have artificially lowered Treasury yields.

Analysts expect the report will show foreign Treasury purchases lagged agencies for the second consecutive month, although they do not expect the amount of Treasury purchases to be as low as December's $8.3 billion, which was the lowest since Sept. 2003. Sean Callow, currency strategist at IDEAglobal, expects total purchases of Treasuries to hit $10 billion, with agencies at $28 billion. While William Prophet, interest-rate strategist at UBS, does not expect such a large gap, he agreed foreign interest in Treasuries has fallen. "The focus on Treasuries is definitely fading among those accounts," he said. Prophet expects purchases of Treasuries to range from $16-19 billion, with agencies ranging from $21-23 billion.

11 Mar 2005