Have Foreign Buyers Lost Their Appetites for U.S. Debt?
November 15, 2023
The U.S. Treasury market is in the midst of a supply-and-demand shakeup. Supply is exploding, with the Treasury issuing a net $2 trillion in new debt this year, a record high aside from the pandemic borrowing spree in 2020. At the same time, overseas buyers who were once an important source of demand, particularly China and Japan, have become less reliable.
A recent auction of 30-year Treasuries received much less demand than investors typically offer. The auction’s “primary dealers,” big banks who are essentially obligated to buy whatever portion of the auction’s offerings are not purchased by other investors, ended up purchasing nearly a quarter of the issuance. That is more than double what they purchase at typical 30-year auctions, according to BMO Capital Markets.
A group of Wall Street executives that advise the U.S. Treasury, known as the Treasury Borrowing Advisory Committee, recently warned of waning demand from two regular buyers: banks and foreigners. Foreign investors, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago, according to data from the Securities Industry and Financial Markets Association.
Overseas investors shed $2.4 billion in long-term Treasurys in September, bringing their holdings to $6.5 trillion, according to data from the U.S. Treasury. On a rolling 12-month basis, the pace of foreign buying has eased to around $300 billion in recent months from levels above $400 billion for much of last year, according to data from the Council on Foreign Relations that also adjusts for changes in valuation.
The makeup of overseas buyers is also shifting. European investors have bought $214 billion in Treasurys over the past 12 months, and countries in Latin America and the Middle East have also added to their holdings. At the same time, Japan and China, who have historically been steady Treasury buyers, shed their holdings by $182 billion.
Central banks across the globe have slowed purchases of U.S. Treasurys. The strength of the dollar has spurred this decreased demand somewhat. China has diversified its reserves and has been investing in other bonds backed by U.S. government agencies, such as Freddie Mac, which offer higher yields than Treasurys.