Goldman Sachs: Higher Demand From Foreign A/c For The Rest Of The Year

Goldman Sachs note that "earlier in the spring, we saw significant drawdowns in foreign accounts' holdings of US Treasuries. While US-TIC data show some reversal since then, purchases by both the foreign official and private sector have largely been concentrated in bills; longer-maturity UST holdings have barely recovered. Through much of 1H20, we believe this was due to the absolute low level of yields and elevated FX hedging costs. More recently, however, USTs have underperformed relative to other markets and FX hedging costs have compressed over the past few months, increasing their relative yield pick-ups. As a result, we expect to see an increase in foreign purchases of longer maturity USTs over the remainder of the year, particularly given our expectation for higher UST yields relative to other DM sovereigns. Indeed, we've started to see early signs of a pickup in August, where TIC data show, after accounting for valuation adjustments, foreign private investors net added long-term Treasuries after five consecutive months of net sales. While foreign official sector demand for longer term US Tsys has yet to pick up, our FX strategists anticipate further dollar weakness, which may translate to additional US Tsy demand from reserve increasing interventions if dollar depreciation is substantial."