Chart of foreign flows of US Treasuries over time: i.imgur.com/sPYl8E5.png
- Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington.
- The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately.
- Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020.
- Masatoshi Yamauchi, an executive officer at All Nippon Asset Management, whose main clients include regional banks, said Japanese banks have continued to invest in U.S. Treasurys, but with shorter durations, and without hedging currency risk, which is currently very costly for Japanese investors. But they, too, might soon lose interest in the U.S., he warned.
“U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.”
Earlier this month, a U.S. Treasury auction of 30-year bonds was met with tepid demand, spooking markets broadly as investors feared more supply-demand disruptions to come. A group of Wall Street executives that advise the U.S. Treasury, known as the Treasury Borrowing Advisory Committee, recently flagged waning demand from two big-time buyers: banks and foreigners.
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