Foreign investors are reevaluating their exposure to U.S. Treasury securities as currency hedging costs reach unprecedented levels. The premium that once made Treasuries attractive to global buyers has effectively disappeared, with hedging expenses now exceeding yields on benchmark 10-year notes. This dramatic shift is forcing institutional investors to reconsider their traditional allocations to dollar-denominated debt.
The root causes of this transformation lie in diverging monetary policies across major economies. While the Federal Reserve maintains its restrictive stance, other central banks have adopted more accommodative approaches, creating significant interest rate differentials. These policy gaps have pushed currency hedging costs to levels not seen in over a decade, fundamentally altering the risk-reward calculus for foreign investors.
European and Japanese buyers face particularly acute challenges. For euro-based investors, the annual cost to hedge dollar exposure now stands at 3.5%, compared to the 10-year Treasury yield of just 2.8%. This negative carry trade has made domestic government bonds suddenly more appealing, with German bunds offering positive returns after accounting for hedging costs. The situation mirrors previous episodes of dollar strength, but with more severe consequences due to today’s elevated rate environment.
Looking ahead, these dynamics could have lasting implications for Treasury market liquidity and U.S. funding costs. As foreign demand weakens, the market may become increasingly reliant on domestic buyers to absorb growing government debt issuance. This shift comes at a particularly sensitive time, with concerns about fiscal sustainability and debt affordability already weighing on investor sentiment. The Treasury market’s traditional role as the world’s safe haven asset now faces its most serious challenge in years.
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