The Foreign Holders of the Ballooning US Debt: They’re Buying, But Don’t Keep Up

Estimated Reading Time: 2 minutes

China dumps Treasury securities, the Euro Area, Canada, and financial centers load up with immense appetite.

The question that’s on everyone’s mind is how long foreign investors will continue to support the US Treasury debt that has now ballooned to $34.75 trillion and will nail $35 trillion over the next few months. These securities are all held by someone, and a portion of them are held by foreign entities.

So far, demand for these Treasury securities from all directions has been huge, as documented by the 10-year yield that should be above 5%, given where inflation is (3.4% core CPI with lots of uncertainty surrounding it), and where short-term yields are (5.5%). But the 10-year yield is just 4.2%.

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The share of foreign holdings.

Foreign investors have continued to add to their holdings of Treasury securities over the years, but the US debt has grown far faster, and so the share of the debt that is held by foreign entities has been declining for many years. In 2014-2016, foreign investors held over 33% of the debt. Their share is now down to 22.9%.

In other words, the US debt financing has become far less dependent on foreign holders – and as we’ll see in a moment, even less dependent on China and Japan.

In dollar terms, Treasury debt held by foreign entities rose to an all-time high in March, and in April dipped a tad, to $7.92 trillion, which was up by $468 billion year-over-year, or by 6.3%, according to Treasury Department data on Tuesday (red line in the chart below).

  • Top six financial centers (London, Belgium, Luxembourg, Switzerland, Cayman Islands, Ireland): $2.3 trillion (blue), +9.2% year-over-year, despite a dip in April from the all-time high in March.
  • Japan, #1 US creditor: $1.15 trillion (green), +2.2% from a year ago. Over the past 12 years, Japan’s holdings have remained in the same range between $1.0 trillion and $1.3 trillion, hitting the low end of the range in 2011 and 2018.
  • China and Hong Kong combined: -9.1% year-over-year, to $992 billion (purple), up a tad in April from the lowest in many years.

China + Hong Kong v. the Euro Area.

China and Hong Kong whittled down their combined holdings from over $1.4 trillion in 2012-2017 to $992 billion now (blue). During the capital-flight panic in 2016, China’s holdings of Treasury securities fell sharply as it tried to prop up the RMB. It increased its holdings again, but never all the way back to the prior level, and holdings have declined from then on.

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The countries of the Euro Area piled into US Treasury securities at a furious rate, expanding their holdings from $500 billion in 2011 to $1.58 trillion now (red), and increase of over $1 trillion. Year-over-year, the Euro Area’s holdings surged by $202 billion, or by 14.6%!

The six largest financial centers – the UK (the City of London), Belgium, Luxembourg, Switzerland, Cayman Islands, and Ireland: +9.2% year-over-year to $2.31 trillion, the second-highest level ever, just behind March, having more than tripled since 2011!

 

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Continue reading this article at Wolf Street.

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