The first Treasury auctions of the month attracted improved investor demand, diluting concern that foreigners were avoiding US debt amid the war in the Middle East.
An auction of 10-year notes Wednesday drew a yield only slightly higher than anticipated, a sign that demand nearly matched expectations. Together with strong demand for a three-year note sale Tuesday, it allayed concern that the war is pushing up borrowing costs by sidelining buyers.
Gains for Treasuries spurred by a temporary cease-fire agreement trimmed the yield for the sale, which exceeded 10-year auction results since July. Still ahead this week is a 30-year bond auction, the third of the US government’s seven major monthly debt sales.
Treasury Department data for the three auctions conducted during the first half of March revealed declines in the shares awarded to foreign accounts. Combined with Federal Reserve data showing a drop since mid-February in the amount of Treasury debt held in custody for foreign official and international accounts, it has advanced the theory that the war dented overseas demand for US debt, either directly or via the surge in oil prices it unleashed.
“The March auction data doesn’t prove or disprove that theory as it is only one month of auction results, but the fall in foreign custody holdings indicates this may be the case,” said John Briggs, head of US rates strategy at Natixis SA’s US investment bank. It’s too early to draw any conclusions from this week’s sales, he added.
Demand was weak for most of last month’s auctions from investors of all stripes as elevated market volatility discouraged participation. The Treasury market suffered its biggest loss in a year as the oil surge drove up inflation expectations and mostly eliminated wagers on Federal Reserve interest-rate cuts this year.
Foreign demand, however, has since been shown to have reversed a months-long trend of improvement in March. Treasury Department data released March 25 showed that the shares of three- and 10-year debt auctions allotted to foreign and international accounts declined to the lowest levels since October. For the 30-year auction, the share was the lowest since July.
Those auctions were conducted during the first half of the month. Sales of two-, five- and seven-year notes fall during the second half. Allotment data for those sales — all of which drew higher-than-anticipated yields, a sign of weak demand — is slated to be released Wednesday at 3 p.m. in Washington. Twenty-year bonds, also sold during the second half of the month, fared better.
Reduced Treasury auction participation is an option for foreign buyers needing cash for currency intervention of to buy oil, or simply “as a cautionary move,” Briggs said.
The US relies less on foreign capital than in the past. The $9.3 trillion of Treasury securities held abroad in January accounted for about 30% of the $31 trillion market. In 2008, the share peaked at 56%, but the market was a fraction of its current size, and foreign holdings were under $3 trillion.
The slide in Treasuries held at the Fed on behalf of foreign and official accounts — amounting to about $66 billion since the war began — has reinforced speculation that overseas appetite for US debt has ebbed, possibly related to the oil price surge, said Jonathan Cohn, head of US rates desk strategy at Nomura Corp.’s US securities arm.
“Foreign official selling has rightfully received attention since the start of the war,” Cohn said. Several big oil-importing countries such as Turkey, India and Thailand needing to raise cash “has likely contributed to the meaningful reduction in foreign official Treasury holdings at the Fed” and a concurrent increase in the amount on dealer balance sheets, particularly in the two- to three-year sector, he said.
As a tactic, shedding Treasuries to raise cash is part of a toolkit that also includes reducing foreign-exchange and gold reserves, Cohn said.
The Fed holdings trend comports with Bank of New York Mellon Corp.’s custody-based data on institutional investment activity, according to John Velis, Americas macro strategist at BNY.
Cross-border holdings of Treasuries “have been falling almost inexorably since last April,” when the US administration unveiled a tariffs agenda that upended global trade, Velis wrote in an April 7 report. Cash-like securities maturing in less than a year account for much of the drop, he said.
“It’s too early to tell if this shedding of USTs by foreign-based investors is the beginning of a secular decline in demand for USTs or merely a response to a higher inflationary environment and U.S. policy uncertainty,” Velis wrote.
As for last month’s auctions, elevated market volatility that deterred all types of investors, rather than foreigners in particular, may explain their poor results, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.
“When markets are chopping around on tweets and headlines from the Middle East, a lot can change very quickly,” he added. “Calm market conditions are good for auctions.”
At the same time, a shift in Treasury market sentiment since yields reached their highest levels in several months at the end of March may translate into better results for this month’s auctions, said Priya Misra, portfolio manager at JPMorgan Asset Management.
Yields mostly ratcheted higher with oil prices in March. They’ve since retreated from those levels despite further gains for oil — until the cease-fire agreement — because of the potential for the energy price shock to hurt the US economy.
Tuesday’s good three-year note auction results are “testament to a cleaner positioning backdrop, level of rates not seen since June 2025 and investors starting to price in not just inflation risks but also growth risks from this conflict,” Misra said. “The relationship between oil prices and front end rates has changed from the early days of the conflict.”
With assistance from Alexandra Harris.
This article was generated from an automated news agency feed without modifications to text.
