UPDATE: Falling foreign demand for Treasurys puts bondholders in 'vulnerable' position
By Sunny Oh
Fed reducing its $4.5 trillion portfolio of Treasurys and mortgage-backed securities
A force that's helped to keep a cap on long-term U.S. Treasury yields may be waning.
Buying by foreign investors in Treasury auctions has slipped, according to Torsten Slok, chief international economist for Deutsche Bank (DBK.XE). This could pave the way for a slide in long-dated paper, pushing up yields, as the Federal Reserve this month begins unwinding its $4.5 trillion portfolio of Treasurys and mortgage-backed securities.
Bond prices move in the opposite direction of yields.
See: Record level of investors are bearish on long-dated Treasurys (http://www.marketwatch.com/story/bond-market-bears-are-back-with-a-vengeance-in-one-chart-2017-10-03)
The government's auctions of 10-year Treasury notes and 30-year bonds have seen indirect buying, a proxy for foreign demand, fall steadily since 2016 (see chart below).
Though indirect buying data is somewhat volatile and does not make the distinction between central banks who need foreign-exchange reserves and private investors seeking to reap a return, Slok points out the downtrend coincides with a drop in the bid-to-cover ratio, which reflects overall auction demand.