Citi sees limited impact of US asset downgrade on foreign demand

On Monday, Citi’s rates strategist provided insights into the recent downgrade of US assets and its potential impact on foreign demand. The strategist stated that while there is potential for 30-year Treasury yields to reach new highs, the downgrade should not significantly affect foreign demand for US Treasuries. This sentiment is reflected in the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), currently trading at $85.70, near its 52-week low of $84.89, with a notably low beta of 0.49 indicating reduced volatility compared to the broader market.InvestingPro analysis reveals several additional metrics and insights about Treasury market dynamics that could impact your investment decisions. Subscribers gain access to comprehensive market analysis and real-time updates. This perspective comes despite concerns that the downgrade might reignite fears around foreign investment in US assets, which contributed to a sell-off in early April following tariff announcements.

The strategist noted that foreign investors had purchased approximately $138 billion in long-term US Treasuries in March, as indicated by the latest Treasury International Capital (TIC) data released on Friday. This strong demand preceded a sell-off in swap spreads in April, attributed to hedge funds in the Cayman Islands and the UK holding long positions. Despite market volatility, TLT maintains a strong financial position with a current ratio of 2.77 and has consistently maintained dividend payments for 24 consecutive years, currently offering a 4.56% yield.

Citi’s analysis suggests that foreign demand for US Treasuries remained stable after a similar downgrade by Fitch in 2023. The strategist also pointed out that the fiscal landscape in the US is becoming more challenging, which could limit demand for US Treasuries in the short to medium term.

Over the weekend, the House Budget Committee moved forward with the budget reconciliation bill, although it encountered abstentions from four congressmen, indicating possible hurdles before it can pass through the House and Senate. The strategist believes that the downgrade might prompt Republican lawmakers to restrain fiscal expansion to some extent.

Finally, the strategist addressed the uncertainty surrounding tariff revenue, projecting it to be significantly lower than initially expected post-negotiations. Even with spending cuts, the deficit is projected to increase next year as tariff revenue is unlikely to cover the costs of extending the Tax Cuts and Jobs Act (TCJA). For investors seeking deeper insights into Treasury market trends and their portfolio implications, InvestingPro offers comprehensive analysis tools and expert recommendations to navigate these fiscal challenges effectively.

In other recent news, the U.S. Federal Reserve is reconsidering its monetary policy approach amid potential supply shocks, according to Fed Chair Jerome Powell. The Fed’s current strategy, adopted in 2020, is under review due to recent inflation experiences and the possibility of more frequent price increases. Meanwhile, Federal Reserve Governor Adriana Kugler highlighted the challenges of assessing economic strength due to swift trade policy changes, particularly with the U.S. and China agreeing to temporarily halt some tariffs. Kugler noted that these uncertainties make it difficult to predict future growth and inflation, impacting the Fed’s interest rate decisions.

Additionally, China’s holdings of U.S. Treasuries are under scrutiny following significant fluctuations in the bond market. Analysts speculate that China’s potential offloading of U.S. debt could be a response to high American tariffs, although concrete evidence is lacking. In the financial sector, JPMorgan analysts expressed a cautious outlook for the first half of 2025, suggesting that international equities might outperform U.S. markets due to trade uncertainties and recession risks. They noted a divergence between resilient hard data and weakening soft data, with potential implications for equity markets. These developments reflect ongoing global economic challenges and the evolving strategies of central banks and financial institutions.

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