Are Treasuries losing support from foreign investors?

In addition to fiscal considerations, Marshall says, some market participants have voiced the concern that tensions surrounding tariffs might be causing investors to sell Treasuries. “This broad-based approach that we saw in terms of tariff policy introduced real concern that foreign investors might meaningfully pull back their support for Treasuries in aggregate,” he says.

Marshall points out that foreign investors own around 30% of the Treasury market. “But there isn’t a lot of evidence to suggest that there was active selling from the foreign official sector — the central banks that might be relatively sensitive to these shifting political tides,” he adds.

Over the longer term, however, Marshall doesn’t rule out the potential for diversification away from dollar assets. “Dollar assets have held a pretty privileged place in the global ecosystem. And so the idea that the events of the past few months potentially dent that position to some extent is, I think, a reasonable concern to have.”

What are the global factors to consider in the context of recent Treasury volatility?

The recent signs of weakness in Treasuries have implications for other sovereign debt markets.

“We’ve seen large swings across G10 rates recently, with some correlation at times to what’s going on in the US — though not quite as consistent,” Marshall says. “Given these cross currents, I think it’s useful to bear in mind that where the US is looking at potentially a very large inflation hit coupled with meaningful growth downside risks, outside the US, the balance skews a little bit more to the growth side of things,” he adds. This could mean that the case for government debt as a hedge against volatility is somewhat stronger in non-US developed markets.

Another important consideration is the borrowing and fiscal support announced by other governments in response to geopolitical risks and the economic situation. European governments have unveiled plans to raise defense spending, which Goldman Sachs economists say will lead to higher borrowing and GDP growth.

“In terms of deficit as a share of GDP, you can make the argument that the US picture is going to remain somewhat stable at high levels, but beyond the US, the direction of travel is towards slightly larger deficits,” Marshall says.

Globally, this is likely to mean an increased supply of safe assets in the coming years, which could have knock-on effects for the Treasury market.

Is volatility in Treasuries here to stay?

Looking at the three main factors that may have driven the recent weakness in Treasuries — concerns about the path of the US economy, a reassessment of the implications of tariffs for US debt, and a possible shift away from dollar assets — Marshall concludes that the Treasury market may be past the local peak point of concern. But he adds that all three shocks could remain drivers of uncertainty in the market for some time to come.

While the 90-day delay of reciprocal tariffs allays concerns of a more severe tariff scenario in the near term, “you still have 10% tariffs across most trading partners and a significant increase for China, which is more than most investors had pencilled in at the beginning of the year,” Marshall says.

Similarly, the tension between growth and inflation in the US economy has not been resolved, the question of whether foreign investors are diversifying away from dollar assets is likely to persist, and environments of episodic concern about fiscal sustainability may be a reality for the Treasury market on a go-forward basis, Marshall says.

That said, there are also factors that could be positive for the Treasury market, such as a push for regulatory changes that could make it easier for banks to facilitate the absorption of Treasury supply.

“When I think about the landscape in two years’ time, I think that there’s a decent case to be made that there will still be some lasting headwinds to Treasuries, but that they will be offset to a degree by potential shifts in other dimensions, including policy,” Marshall says.

 

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