Should asset owners ditch their US Treasury holdings?
Several asset owners have ditched their US Treasury holdings recently as yields rise despite Scott Bessent’s interventions, but despite these assets losing some of their predictability for many they remain “the safest of a bad bunch of places”. (Callaghan O'Hare/Reuters)
Good morning. There’s been a lot of discussion about US Treasuries lately, given yields rose to their highest level in years – despite Treasury secretary Scott Bessent’s intervention.
Following Norges Bank’s decision to cut Treasury holdings in its $2.3tn Government Pension Fund Global from 70 per cent of its bond holdings to 50 per cent, and invest in assets such as mortgage-backed securities instead, I thought I’d take the temperature of asset owners.
The first thing to say is that Norges Bank is not the first asset owner to express doubts about US Treasuries, as longer-term readers of AOX will recall.
In January the $25bn Danish AkademikerPension fully divested its $100mn Treasury holdings due to “poor US government finances”.
They are not the only ones to do so – for example Alecta, the largest occupational pension fund in Sweden at $125bn, also sold most of its US Treasury holdings earlier this year due to the asset’s “reduced predictability”.
But this has largely remained a niche activity so far. Over the past 12 months AOX has learned of only eight asset owners in Europe which have exited or reduced their US Treasury holdings – or announced plans to do so (nine including NBIM). One has increased its exposure.
Interestingly it’s largely confined to asset owners in northern Europe – Germany, Sweden, the Netherlands, Denmark.
We will be looking in a bit more depth at Japan – the biggest foreign holder of US Treasuries – in a couple of weeks.
Ajith Nair, chief investment officer at Isio Investment Management, says: “Concerns around US fiscal sustainability, continued heavy Treasury issuance and a shift in the policy backdrop have all contributed to a more uncertain environment.”
But he says this is part of a broader picture of government debt in general becoming less attractive due to substantial borrowing by AI companies and rising inflation due to the conflict in Iran.
He says: “Developed market government bonds are no longer providing the same level of defensive ballast that investors have traditionally expected.
“While they remain an important portfolio tool, we continue to see better risk-adjusted opportunities in shorter-dated, high-quality credit, including areas such as asset-backed securities, which have proven more resilient and continue to offer attractive levels of income in a higher-volatility environment.”
Zuhair Mohammed, partner and head of investment at LCP, agrees this is part of a wider trend in which most developed countries are facing higher debt and ageing populations.
He says: “I cannot see a reason why debt will suddenly come under control.
“All sovereign bonds are behaving in a very volatile way. The US is the safest of a bad bunch of places.”
His recommendation is to buy sovereign bonds at the shorter end of the duration spectrum and corporate bonds.
Mohammed does have a word of warning for those, like NBIM, considering replacing Treasuries with asset-backed securities.
He says: “You get an extra yield and I accept that. But if something bad happens in Treasuries it will come home to roost in those assets as well.
“Moving into asset-backed securities goes on the assumption that the international finance rulebook is exactly the way it is going to be forevermore. But when governments are in difficulty the rulebook goes out of the window quickly. We saw that in 2008.”
