(Bloomberg) — Foreign investors are showing signs of diversifying away from US Treasuries as debt levels mount, according to the financial industry’s global trade group.
Net purchases of US government debt by foreign investors have been stable this year, while Japanese and European sovereign debt have seen increased accumulation by foreigners, according to a Wednesday report by the Institute of International Finance. The association represents about 400 banks, insurers and asset managers.
“Recent market developments point to early signs of portfolio diversification, particularly in cross-border investments in government securities,” a team at the IIF including Emre Tiftik and Khadija Mahmood wrote. “These trends partly reflect diverging debt trajectories” as the US debt-to-GDP ratio is expected to continue rising while those in Europe and Japan are on a more moderate path, they added.
With support from domestic demand, the Treasury market has avoided liquidity stress, the report said. Meanwhile, foreign demand for US corporate bonds has been particularly strong this year despite the surge in oil prices since the end of February, when the US attacked Iran, disrupting Middle East exports.
“Middle East tensions have had limited spillovers beyond energy markets to date,” the analysts wrote. “After an initial hit, global risk appetite has recovered quickly, with few signs of imminent debt market stress.”
In particular, sovereign bond issuance in emerging markets continued at a record pace, with high-yield issuers like the Democratic Republic of Congo selling global bonds for the first time in April. Ecuador is expanding two previous offerings on Wednesday and Bolivia is expected to borrow in the coming days.
Over time, the conflict stands to increase the nearly $353 trillion global debt stock as higher energy and food prices force governments to borrow more and at higher cost, the analysts wrote.
“If the Middle East conflict persists, prolonged price pressures will feed through to borrowing costs,” they wrote. “The risks are real.”
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