US Treasury Holdings by Foreign Investors Continue Rising Amid Sell-Off Myths

There appears to be a frequently repeated myth on social media that foreigners are selling US Treasury bonds in large quantities. Often, the myth is supported by the belief that certain foreign governments, such as China, Japan, and Saudi Arabia, are rapidly selling down their US Treasury securities.

Concerns about trade deficits, inflation, and geopolitical tensions are used to support the rationale. Furthermore, some believe their US bond holdings give these countries significant political leverage. The myths are false. As shown below, the reality is that foreign ownership of US Treasury debt continues to increase steadily. In fact, the growth of Treasury debt ownership is running at 10%, decently above the pace of the ten years prior.

This falsehood stems from a misunderstanding of how international finance operates. A large majority of foreign trade occurs in dollars. Accordingly, foreign nations must hold dollars. Whether in a bank or through direct purchases of bonds, a significant percentage of the US dollar, also known as reserves, ends up in the Treasury market.

Unless another currency usurps the dollar’s reserve status, this will continue to be the case. Moreover, global economic growth and inflation lead to increased dollar trade, resulting in more dollar reserves and, ultimately, more US Treasury holdings by foreign investors.

Selling large amounts of Treasuries, as some claim, would likely lead to significant losses for the sellers due to the impact it would have on the bond market and their remaining bond holdings. Thus, the myth of a mass sell-off is unfounded, as it would be financially counterproductive for foreign investors, who rely on the stability and interest payments provided by Treasuries.

The Week Ahead

The quarter-end on Tuesday should bring some volatility to markets as institutional investors rebalance and window-dress their portfolios. Often, securities that are impacted in one direction prior to the quarter end are affected in the opposite direction following the quarter end.

Jobs data will headline the week with JOLTs on Monday, ADP on Tuesday, and the BLS employment report on Friday. The Wall Street consensus is a mere 39k new jobs, which appears to be a low bar for the report. Thus, a surprise to the upside would not be unexpected.

Moreover, a number over 100k may lead some investors to downgrade the odds of more Fed cuts this year. Also of interest will be the ISM manufacturing and services reports. In particular, we will focus on the employment and prices subcomponents. In both surveys, jobs have been in contraction, but prices are running hot.

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