Foreign investors had a big appetite all year for Treasury securities. But China lost interest, Japan struggled with the yen.
By Wolf Richter for WOLF STREET:
The question on our worry-list is how long foreign investors will continue to support the recklessly ballooning US Treasury debt, that has soared to $35.8 trillion, from $35.0 trillion on July 27. If demand slacks off, yields will have to rise to create more demand, and that could get expensive.
Foreign investors play a big part in this demand, but proportionately not as big as years ago. The importance of China and Japan has dwindled, while the Euro Area, big financial centers, and other countries, including Canada, Taiwan, and India, have piled up Treasury securities and have become large holders.
So far, knock on wood, there has been solid demand from foreigners: They piled up Treasury securities at an accelerated pace since late 2022 as the Fed’s rate hikes and higher long-term yields made US Treasury debt more attractive than a lot of sovereign debt that yields less than US debt.
For example, Italy’s 10-year yield is at 3.36% currently, versus 4.08% for the US 10-year yield, which has risen since the rate cuts. France’s 10-year yield is at 2.90%, Germany’s is at 2.19%, Japan’s is at 0.97%, which is far below Japan’s inflation rate (core CPI increased by 2.4%). And they all have their ballooning-debt problems, none more than Japan.
So for investors, these foreign yields are crummy deals compared to the US 10-year yield of 4.08%, and so there is demand. Cleanest dirty shirt.
Treasury debt held by all foreign entities jumped by 2.0% in August from July, and by 11.5% year-over-year (+$880 billion), to an all-time high of $8.50 trillion, according to Treasury Department data Thursday afternoon (red line in the chart below).
In summary, the biggest holders:
Top six financial centers: $2.51 trillion, +3.6% month-over-month, +14.2% YoY (blue). They are: London, Belgium, Luxembourg, Switzerland, Cayman Islands, and Ireland.Euro Area: $1.69 trillion, +2.3% MoM, +13.5% YoY (green). This includes three of the financial centers above (Belgium, Luxembourg, and Ireland).Japan: $1.13 trillion, +1.2% MoM, +1.2% YoY (gold).China and Hong Kong combined: $1.01 trillion, +0.3% MoM, +0.2% YoY (purple).
The chart also shows how the importance of Japan and China has dwindled over the past 12 years, from being by far the top two foreign creditors in 2012, to being far below the financial centers and the Euro Area in 2024
The share of foreign holdings had dropped from the peak of 34% in 2015 to a low of 22.2% by October 2023, as the US debt ballooned faster proportionately than foreigners increased their pile of it – they increased their pile but more slowly than the debt grew.
But since October 2023, foreigners increased their holdings at a faster pace than the debt ballooned, and the share of the debt that foreign investors are holding has risen, and in August reached 24.1%, the highest in two years.
The six largest financial centers: +3.6% MoM, +14.2% YoY, to a record $2.51 trillion. Their holdings more than tripled since 2012!
These countries specialize in handling the financial holdings of global companies, individuals, and governments. Ireland is a favorite for US mega-corporations to store their profits. So some of the holdings at these financial centers are actually held for US entities, and not foreign investors.
UK (“City of London” financial center): +2.1% MoM, +18.5% YoY, to $744 billionLuxembourg: +0.5% MoM, + 9.9% YoY, to $402 billionCayman Islands: +11.0% MoM, +35.5% YoY to $420 billionIreland: +2.9% MoM, +9.5% YoY, to $322 billionBelgium (home of Euroclear): +2.9% MoM, +2.6% YoY, to $325 billionSwitzerland: +3.8% MoM, +4.5% YoY to $296 billion.
Euro Area v. China + Hong Kong. China and Hong Kong combined have reduced their holdings from $1.45 trillion in 2015 to $1.01 trillion in August (blue). Over the past five months, their holdings have inched up. Year-over-year, their holdings were essentially unchanged.
The countries of the Euro Area have more than tripled their holdings in 12 years, from $534 billion in 2012 to a record $1.69 trillion August (red).
The Euro Area’s holdings surged by 2.3% MoM and by 13.5% YoY (or by $200 billion YoY)!
There have been reports that China has shifted some of its USD holdings from Treasury securities to US Agency securities due to their slightly higher yields. US Agency debt is not included here.
Japan’s holdings: +1.2% MoM, +1.2% YoY, to $1.13 trillion.
Authorities have been struggling to contain the plunge of the yen. It currently trades at around 150 yen to the USD. Since early 2022, the yen has lost roughly 30% of its value against the USD because the Bank of Japan has decided that it would do the absolute minimum as late as possible to tighten monetary policy.
The BoJ has hiked policy rates twice, two tiny baby steps, from -0.1% to 0.25% currently. And over the past few months, it started slow-motion QT. To prevent the yen from collapsing further, the Ministry of Finance intervened in the foreign exchange markets multiple times, selling large amounts of USD holdings to buy yen with it.
Despite big gyrations in its Treasury holdings, in August, they were where they’d been in mid-2013.
United Kingdom: +2.1% MoM, +18.5% YoY, to $744 billion. The City of London is one of the top financial centers in the world, and so a portion of those securities could be held for US clients. The UK is also included in the Top Six Financial Centers above.
Canada: -3.3% MoM, +23.8% YoY to $365 billion. Since March 2021, holdings have more than tripled. Over the past 12 years, holdings have multiplied by a factor of 7!
Taiwan: +3.4% MoM, +18.0% YoY, to $284 billion:
India: +3.0% MoM, +5.8% YoY, to $246 billion. Its holdings have multiplied by a factor of 6 since 2012:
Brazil: +1.8% MoM, +4.5% YoY, to $233 billion. Between 2018 and 2021, Brazil cut its holdings by about one-third, undoing the entire spike of its holdings in 2018. Since January 2023, its holdings have zigzagged higher.
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