China’s Role in U.S. Bond Market Shrinks With Other Foreigners
The share of U.S. debt being held by foreign investors just keeps on shrinking.
China’s holdings fell in September to the least since February 2017, and by some measures the nation was the biggest seller of Treasuries. The largest non-U.S. holder — Japan — offloaded American government debt for the second straight month. Foreign ownership of the $20.4 trillion market has been on a decade-long retreat with domestic buyers — from mutual funds to pension plans — filling in the gap.
Of course, this year the Federal Reserve has been the biggest domestic player, snapping up some $2 trillion since March as part of its efforts to counter the economic toll of the Covid-19 pandemic. Yet despite its heavy hand, the Fed still trails the role that many other major central banks play in their domestic sovereign-bond markets.
“As the Federal Reserve threw the kitchen sink at the markets in order to keep U.S. dollars flowing around the world, their holdings of Treasury securities have grown astronomically,” Greg Blaha, an analyst at Bianco Research LLC in Chicago, wrote in a note.
The Fed’s buying has helped contain government borrowing costs, keeping the 10-year yield below 1%. The purchases come as the Treasury is on track to issue an unprecedented amount of debt — more than $4 trillion — to fund relief spending. Yet with debt supply likely to pick up even further as virus cases explode again, the Treasury market needs all the buyers it can get, domestic and abroad.
President-elect Joe Biden called on Congress this week to pass a $2.4 trillion bill to shore up the economy. More than 10 million workers will lose unemployment benefits by the end of December, according to economists at Deutsche Bank and Evercore ISI.
As far as the demand needed to match all that supply, China lost its status as the largest non-U.S. holder of Treasuries to Japan more than a year ago. And even as Japan’s stockpile in September held close to its most ever, the nation’s share of total U.S. government debt has declined to the least ever, at 6.3%, according to Jefferies.
“Demand from Japanese investors — and foreign investors on the whole — is not keeping up with the pace of issuance,” Jefferies economists Thomas Simons and Aneta Markowska said in a note.
So far, the Fed doesn’t appear to be at risk of permanently altering the diversity of the base of buyers for U.S. debt. And neither the Fed nor the Treasury likely wishes for the U.S. to mirror Japan’s sovereign debt market, which is dominated by the central bank and local investors.
That type of scenario is unlikely to occur anytime soon. When it comes to ownership of its home nation’s sovereign bonds, the Fed at present trails many of its central bank counterparts — such as the Bank of Japan and even the Reserve Bank of New Zealand — by a wide margin.
Still, the Fed’s share may have room to grow should nations like China continue to take a step back as the supply of Treasuries explodes.
“At the country level, our valuation-adjusted estimates suggest that China resumed net sales of U.S. Treasuries and was the largest net seller of Treasuries in September, while the U.K. was the largest net buyer,” Goldman Sachs Group Inc. strategists including Vickie Chang wrote in a note. The firm makes adjustment for movements in currencies and fixed-income returns over the period to better capture actual changes in investment flows.
— With assistance by Tom Lagerman, Masaki Kondo, and Alexandre Tanzi
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