Treasuries saw first net outflows in two years, official data reveals

The savage sell-off that hit Treasuries in prior months was driven by concerns a buyers strike had hit the $26 trillion bond market. Its now confirmed: at least one set of investors headed for the exits back in September.

Foreign investors sold $1.7 billion more worth of Treasuries than they bought during that month, data from the US Treasury department shows. This marked the first net outflows since May 2021 and capped the weakest three months for foreign demand since the period ending May 2020.

Treasuries roared back this month as softer US inflation data and signals of a cracking labor market fired up speculation that the Federal Reserves tightening cycle is done. Demand also benefited after yields reached the highest levels in more than a decade in the wake of that sell-off in September and October. 

Lower inflation, high yields and the comfort that central banks are essentially done hiking are compelling drivers for investors to wade back into fixed income now, said Prashant Newnaha, a rates strategist in Singapore at TD Securities Inc. September was a time when Treasuries were not on a lot of investors menus as markets faced issues digesting a surge in issuance at a time when strong growth signaled a need for higher real rates and term premiums.

The bond market has remained volatile as concerns linger that supply could overwhelm demand. A sale of 30-year US bonds last week was one of the worst auctions of the past decade, highlighting why investors remain wary about committing to holding longer-dated tenors. 

The two biggest foreign buyers of Treasuries both saw the value of their holdings fall in September. Chinas stockpile decreased by the most in a year, while Japanese investors saw a decline to the lowest since March. Japanese portfolios instead piled in to US agency debt, which usually offers higher yields.

A Bloomberg index of Treasuries debt has surged 2.6% since Oct. 31, snapping a six-month losing streak and coming close to erasing losses for this year.