Who is still buying the US debt is an increasingly important question. Here are the foreign investors.
By Wolf Richter for WOLF STREET:
The recklessly ballooning US national debt is now just a hair away from ticking over $35 trillion. It has ballooned by $2.33 trillion in 12 months, even as the US economy was growing at a fairly strong pace. We don’t even want to know by how much it will balloon during the next recession when tax receipts plunge and expenditures explode.
The question on our worry-list is how long foreign investors will continue to support this recklessly ballooning US Treasury debt. So far, there has been solid demand as documented by the relatively low yields on longer-term debt, with the 10-year yield at 4.2%, while the Fed’s short-term rates are between 5.25% and 5.5%. A lack of demand would cause the yield to jump until enough investors find it appealing and buy it.
Foreign investors play a huge role in that demand.
Treasury debt held by all foreign entities rose by 1.1% in May from April and by 9.0% year-over-year (+$671 billion), to an all-time high of $8.13 trillion, according to Treasury Department data this afternoon (red line in the chart below). In summary, the biggest:
- Top six financial centers: $2.37 trillion, +13.4% YoY (blue) – London, Belgium, Luxembourg, Switzerland, Cayman Islands, Ireland.
- Euro Area: $1.60 trillion, +14.8% YoY (gray). Includes Belgium ($313 billion) and Luxembourg ($385 billion), the largest two holders, also included in the Top Six Financial Centers. France is the #3 holder ($283 billion).
- Japan: $1.13 trillion, +2.9% YoY (yellow). But Japan’s holdings dropped sharply in the last two months as the Ministry of Finance sold Treasury securities to buy yen to prop up the yen, to keep it from collapsing further. More in a moment.
- China and Hong Kong combined: -7.3% YoY, to $986 billion (purple), up a tad in May from April.
All amounts here are at face value. This is a debt that the US government owes foreign investors; and the amount it owes is face value of the securities, no matter what market value is of these securities. On the other hand, for investors, these Treasury securities are tradeable assets and they may mark them to market value.
The share of foreign holdings.
While foreign investors have continued to increase their holdings of Treasury securities over the years, the US debt has grown faster, and so the share of the debt that is held by foreign investors declined for many years, from a share of 33% in 2015 to a share of 22% at the low point in October 2023.
In recent month, the share of the debt that foreign investors are holding has risen. In May, it rose to 23.4%, the highest since May 2023:
In percentage terms, US debt financing has become far less dependent on foreign holders than back in 2015 when one-third of the US debt had been sold to foreign investors. And it has become far less dependent on China and Japan; more in a moment.
The six largest financial centers: +13.4% YoY to a record $2.37 trillion, having more than tripled since 2012! They are the UK (the City of London), Belgium, Luxembourg, Switzerland, Cayman Islands, and Ireland.
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: $723 billion
- Luxembourg: $385 billion
- Cayman Islands: $336 billion
- Ireland: $318 billion
- Belgium (home of Euroclear): $313 billion
- Switzerland: $290 billion.
Euro Area v. China + Hong Kong.
China and Hong Kong combined have reduced their holdings from $1.45 trillion in 2015 to $986 billion now (blue). YoY, their holdings fell by 7.3%, or by $77 billion.
The countries of the Euro Area bought US Treasury securities hand-over-fist, tripling their holdings in 12 years, from $534 billion in 2012 to a record $1.61 trillion now (red).
YoY, the Euro Area’s holdings surged by 14.8% or by $207 billion, far outpacing the decline in holdings of China + Hong Kong!
Japan’s holdings: +2.9% YoY, or +$32 billion, to $1.13 trillion.
Propping up the yen: In April and May, holdings plunged by $60 billion. Japanese authorities later announced they blew $62 billion in the foreign exchange market in April and May, selling USD and buying JPY, to prop up the yen and to prevent it from falling through the 160 level. And it worked in April and May. But in June, the yen fell through the 160 level anyway.
There are reasons why the yen has lost over 50% of its value against the US dollar since 2012, a big portion over the past two years (we discussed the reasons here, including why the collapsing yen is not good for Japan, which is why authorities are trying to reverse it.
United Kingdom: $723 billion, +19.3% YoY. Included in the Top Six Financial Centers. 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.
Canada: $354 billion, +33% YoY. Since March 2021, holdings have surged the 233%, from $106 billion to $354 billion now. Over the past 12 years, holdings multiplied by 7!
Taiwan: record $263 billion, +9.8% YoY:
India: $238 billion, -0.2% YoY. Treasury holdings have multiplied by 6 since 2012:
Brazil: $223 billion, -3.0% YoY. Between 2018 and 2021, Brazil cut its holdings by about one-third. Since then, its holdings have stabilized.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
