Foreign Appetite for US Debt Wanes Amidst Shifting Dynamics

The allure of US government debt for foreign investors is experiencing a notable downturn, with the share of Treasury bonds held by overseas buyers dropping from 43% to approximately 30% over the past decade, according to data from the Securities Industry and Financial Markets Association (SIFMA). As the demand weakens, the United States is grappling with an unprecedented surge in debt issuance, reaching $2 trillion this year, a record high excluding pandemic-related borrowing in 2020.

Diminished Foreign Interest:

The Wall Street Journal highlights the diminishing enthusiasm among foreign private investors and central banks for US Treasuries despite the significant increase in supply. Brad Setser, a senior fellow at the Council on Foreign Relations, notes that while US issuance is soaring, foreign demand remains stagnant, particularly from key players like Japan and China. The Treasury Borrowing Advisory Committee anticipates more limited demand from foreign investors.

US Treasury's Response:

In response to lacklustre demand, the US Treasury has altered its strategy, focusing on issuing shorter-term bonds currently in higher order. This shift aims to restore stability to the market, especially given the recent fluctuations in the yield on the US ten-year note, which spiked above 5% before settling around 4.4%.

Foreign Selling and Concerns:

Recent data from the US Treasury indicates that foreign investors sold a net $2.4 billion in long-term Treasury notes in September, reducing their holdings to $6.5 trillion. The Council on Foreign Relations' statistics reveal a slowdown in foreign buying, dropping from above $400 billion to around $300 billion in recent months. A strong dollar is cited as a contributing factor, prompting central banks to cease accumulating or even divest US Treasuries, as they use the acquired dollars to bolster their currencies. Lingering concerns about the widening US government deficits also contribute to the hesitancy among foreign investors.

Summary:

The ever-changing dynamics of foreign hunger for US debt shed light on the constantly fluctuating conditions of the global economy. As the US grapples with a surge in debt issuance and subdued foreign demand, the Treasury's strategic adjustments reflect a nuanced effort to navigate these challenges. The impact of these trends extends beyond financial markets, raising questions about the broader implications for global economic stability and the traditional role of US Treasuries in international investment portfolios.