By Andrew Moran
At a time when the U.S. government is witnessing lackluster domestic interest in bonds, foreign investors are also limiting their exposure to American debt, new data shows.
According to the Treasury Department’s monthly TIC report, foreign investment—central banks, financial institutions, and private investors—into U.S. government debt tumbled by approximately $100 billion to $7.605 trillion in September. This includes bonds, notes, and T-bills.
Japan, the world’s largest holder of Treasury securities, decreased its stake by $28.5 billion, or 2.55 percent, to $1.087 trillion. This is down nearly 3 percent from the same time a year ago.
China continued its steady decline in bond holdings, selling more than $27 billion, or 3.4 percent, to $778.1 billion. Chinese holdings have dropped by about 15 percent over the last 12 months as Beijing attempts to prop up a weakening yuan. Over the last three months, China has sold more than $47 billion, the fastest selling pace for the world’s second-largest economy since 2019.
“Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower,” wrote Torsten Slok, the chief economist at Apollo, in October. “As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months.”
Many Treasury yields are trading at or near 5 percent, the highest levels in 15 years.
Meanwhile, the United Kingdom was one of the largest net sellers in September, abandoning approximately $30 billion worth of U.S. government bonds, reducing its total holdings to $668.9 billion.
Other countries to trim their exposure to U.S. government debt included Canada ($15 billion), Taiwan ($5 billion), India ($3 billion), Hong Kong ($6 billion), and South Korea ($5 billion).
On the other hand, several markets increased their holdings to take advantage of higher yields, such as Luxembourg ($8 billion), Singapore ($3 billion), Saudi Arabia ($5 billion), and Germany ($6 billion).
In total, overseas investors own roughly a third of all outstanding U.S. government debt, down from about 43 percent a decade ago.
Market analysts argue this signals that the world does not possess the same appetite for Treasurys as it once did. The reasons vary, from geopolitical tensions to concerns over Washington’s fiscal path.
But observers warn that whatever the case may be, the sudden reversal in international interest comes at the wrong time since the Treasury is issuing trillions in bonds to help manage the ballooning budget deficit, national debt, and interest costs.
Interest in US Debt Fading
Last month, the Treasury Department announced that the government will borrow $776 billion in the first quarter of fiscal year 2024, down from the previous quarter’s debt sales of $1.01 trillion. In the first three months of 2024, the Treasury anticipates borrowing $816 billion.
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In a separate announcement, the Treasury revealed it would bolster the size of bond sales to help the federal government handle the growing debt load and increasing financing costs. The first action occurred earlier this month when it auctioned $112 billion. Demand was mixed.
For the $48 billion auction involving 3-year notes, primary dealers—financial institutions that scoop up supply that investors do not purchase—accounted for 16 percent of the sale.
The results were slightly better during the $40 billion sale of 10-year Treasurys, with primary dealers buying less than 15 percent of supply. The 30-year bond sale worth $24 billion saw abysmal interest, forcing primary dealers to acquire 25 percent of the issued bonds. Over the last 12 months, the average has been 12 percent.
Additionally, the yields came in higher than what was expected before the auctions started.
Mr. Slok suggested that “the cost of capital will likely stay permanently higher,” citing Treasury issuance, Japan’s yield curve control policy, sovereign credit downgrade, and the Federal Reserve’s quantitative tightening. In order to attract more investment, the U.S. may need to keep rates elevated.
Other countries are still engaging in tighter monetary policy, resulting in higher yields across the globe. The 2-year U.K. government bond, for example, is around 4.5 percent. The Bank of Japan is laying the groundwork for the end of its seven-year bond yield control policy, which recently caused the 10-year bond yield to hit a decade-high of 0.77 percent.
Confidence in Treasury securities is eroding as two downgrades in one year by two of the Big Three rating firms took the financial markets by surprise. In August, Fitch slashed the U.S. credit rating to AA+ from AAA, identifying fiscal deterioration over the next three years. This month, Moody’s lowered its assessment of the U.S. credit outlook from “stable” to “negative,” highlighting Washington’s fiscal challenges and political chaos.
Economists have given up hope, at least for now, that the Federal Reserve will intervene. Because the U.S. central bank is reducing its balance sheet by slashing its holdings of Treasurys, it is unlikely that monetary authorities will reverse course and rush to Washington’s rescue.
Treasury auctions have turned into significant events for Wall Street. If weaker demand persists, will Treasury yields exceed 5 percent heading into 2024?