As China and Russia stock up on about $100 billion in U.S. Treasury bonds, European nations are coming to the rescue.
On Wednesday, Italy, Germany, Spain and Portugal issued a combined $4.2 billion in 30-year debt in order to finance a government medical reserve fund. Ten-year government bond yields fell at all auctions, showing not only that demand for the notes is high but that investors are willing to accept lower returns in order to hold government bonds.
European debt markets have also been bolstered by Britain’s eventual exit from the European Union. After the Brexit vote in 2016, British 10-year bonds plunged because investors feared that the United Kingdom might default on its debt. This time, U.K. 10-year bond yields tumbled to record lows of 1.36 percent after the Conservative Party won the recent general election.
Despite this week’s bond auctions, the world’s largest individual investor, the U.S. and Asian investors continue to have the biggest presence in the U.S. government bond market. In the first half of the year, foreigners held about $7.1 trillion of U.S. debt, according to a Treasury Department report released on Thursday. China was the largest of these investors, with a 4.2 percent share of the $13.4 trillion worth of Treasury debt outstanding.
Also on Thursday, the Treasury Department said that the U.S. had sold $129 billion in short and long-term debt in October, slightly below the $131 billion the government had raised in the previous month. Meanwhile, long-term interest rates have been falling, in anticipation of a tightening of monetary policy from the Federal Reserve. The 10-year Treasury yield has fallen to below 2.8 percent from a high of 3.2 percent a year ago.
For now, the strength of the dollar against the euro has helped prop up stock markets and keep bond yields low, even as wage growth remains weak and the U.S. economy slowed in the third quarter. A strong dollar allows American exports to be sold to customers around the world at a cheaper price.