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Investors shifting money out of US Treasuries

By EARLE GALE in London | China Daily | Updated: 2024-04-11 02:14

A view shows the signboard of the European Central Bank (ECB), on the day of the monthly news conference following the ECB's monetary policy meeting in Frankfurt, Germany, on Sept 14, 2023. [Photo/Agencies]

Europe's relatively low inflation rate and the resulting prospect of the European Central Bank, or ECB, cutting interest rates faster and more often than the United States' Federal Reserve have prompted investors to take money out of US Treasuries and put it into European government bonds.

With the US inflation rate for March at 3.5 percent and after the rate for January and February came in above analysts' forecasts, experts now think the Federal Reserve will cut interest rates later than the ECB.

Additionally, they expect the Federal Reserve to only make two or three cuts this year in comparison to the ECB's three or four.

Andrew Balls, chief investment officer for global fixed income at Pimco, told the Financial Times his company, which manages $1.9 trillion in assets, expects the Federal Reserve to make just two 0.25-percent rate cuts this year.

With inflation in the eurozone falling faster than expected to 2.4 percent in March, many experts say the ECB could make its first rate cut before the summer, AP has reported.

The FT said money managers at financial companies, including JPMorgan Asset Management, Pimco, and T Rowe Price, have increased their exposure to European government debt as a result.

Bob Michele, chief investment officer and global head of fixed income at JPMorgan Asset Management, told the FT: "The path for rate cuts in Europe is clearer than in the US. It is hard to find an economic reason for the Fed to cut rates."

If the ECB does indeed cut rates sooner than the Federal Reserve, the lower rate in Europe would reduce the hedging costs of holding bonds in the eurozone compared with US Treasuries.

The growing enthusiasm for European government bonds has led to the gap between benchmark 10-year German and US borrowing costs widening to 2 percentage points, the FT reported, which is the widest it has been since November.

While the gap is good news for Europe in the short term, it could create a problem if it becomes too wide, analysts say, with the euro likely to weaken as a result, which would push inflation back up.

The high US interest rates that have cooled investors' appetite for US Treasuries could be about to rise even higher, according to the head of one of the world's biggest banks, who is braced for 8 percent.

Jamie Dimon, chairman of JPMorgan Chase, said in his annual letter to shareholders his bank is ready for such an eventuality because of "persistent inflationary pressures" in the US.

He said the bank is prepared for a "very broad range" of scenarios in which rates could be anywhere between 2 percent and 8 percent, the BBC reported.

Currently, the rate is between 5.25 percent and 5.5 percent.

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