Foreign appetite for US Treasuries is no longer insatiable, which is bad news for US debt.
The US Treasury market is currently going through a major change in supply and demand. The Federal Reserve is reducing its holdings of government bonds by $60 billion a month, and foreign buyers are no longer so reliable, especially China and Japan. At the same time, the supply of public debt is skyrocketing.This year the United StatesMinistry of FinanceThe net amount of debt issuance reached US$2 trillion, the highest recorded outside the pandemic in 2020.
In early November, the US Treasury Department announced its new quarterly bond issuance plan, but demand was quite weak, causing widespread panic in the market becauseinvestPeople are worried about the impending imbalance between supply and demand. Several financial industry executives on Wall Street recently suggested that the Treasury Department pay attention to weak demand from two major buyers: banks and foreign buyers. Demand from banks and foreign investors is expected to remain more limited in the medium term.
In response to the recent weak demand for government debt, the US Treasury Department has turned to the issuance of more short-term government debt, which has strong demand, in an effort to restore market stability. 10-year treasury bondYieldIt once exceeded 5%, but has now fallen to about 4.4%.
Individual foreign investors and central banks currently hold about 30% of the total outstanding US public debt, down from 43% 10 years ago, according to data from the Securities Industry and Financial Markets Association.
Treasury data showed that foreign investors sold a net $2.4 billion of US long-term government bonds in September, bringing total balances to $6.5 trillion. Based on a 12-month moving average, foreign investors have bought an average of about US$300 billion of government bonds each month in recent months, down from US$400 billion last year.
The structure of foreign demand for US debt has changed. Goldman Sachs data shows European investors bought US$214 billion over the past 12 months, and investors in Latin America and the Middle East also increased their holdings of US debt, leading to US$182 billion held by Japan and China. The negative impact of reducing its stake was offset.
British investment company Rathbones said the current price of US debt is undervalued. Switzerland’s Pictet Investment Consulting bought US debt when the 10-year government bond yield rose to 5%. Although there are still concerns about the expansion of the US government deficit, all government bonds of other developed countries have real value.
However, Kolapati, head of interest rate strategy at Goldman Sachs, said that although demand for US debt from European private investors has increased, it is not enough to offset the pressure from a long-term structural decline in foreign demand for US debt. “The foreign share of US debt continues to decline. We believe this will remain the case for the foreseeable future.”
The reduction in foreign central bank holdings is still a weakness in US debt. The appreciation of the US dollar has prompted many foreign central banks to stop accumulating US debt and even sell it, using the dollars received to support their currencies.
The People’s Bank of China (the central bank) has reduced its holdings of US government bonds, but increased its holdings of US government-backed agency bonds like Freddie Mac to yield higher yields. From January to August this year, China increased its holdings of institutional bonds by a total of US$32 billion. The activities of Japanese private banks, annuity funds and life insurance companies are also cause for concern, as the Bank of Japan will eventually end its ultra-loose policy, and Japanese bond yields are expected to rise, making it more attractive for Japanese capital. Will become attractive.