Several factors have conspired in recent weeks to drive US Treasury rates sharply higher. These include the Federal Reserve’s program to reduce Treasury holdings by allowing them to mature; growing fiscal deficits in Washington and a Congress missing in action; the downgrade of the US Treasury debt rating by Fitch Investor Services; and high-profile purchases and sales by foreign owners of Treasury debt, writes Juan EadePresident of Argos Research.
Total public debt owed by the US federal government stood at $32.3 trillion at the end of 2Q23. Outside the United States, the two largest holders of American public debt are Japan, which owns 3.5%, and China, which owns 2.5%.
Other nations among the top 10 holders own 9% of the debt, so the top 10 holders collectively own about 15%. The grand total of US debt held by foreign holders is $7.7 trillion, or about 24% of the total.
While the absolute level of holdings has increased by approximately 3% over the past year, we have seen pronounced changes among the largest holders. Japanese bondholders have historically been long-dated, drawn to Treasuries, while yields on their local sovereign bonds have been near zero for years.
However, a recent rate hike in Japan has led to the repatriation of approximately $80 billion of Treasury bonds into local sovereign securities over the past year. China has also been selling, partly for political reasons. China’s current Treasury holdings are down about $135 billion from last year.
But while some nations have reduced exposure, others have increased it. Canada has increased its holdings by 17% and the UK’s increased by 8% last year. We think this kind of global demand for US Treasuries should help keep long-term rates in check in 2024.
This content was originally published on MoneyShow
