In July 2024, foreign investors, countries in particular, significantly increased their holdings of US Treasury bonds, reaching a new all-time high.
This increase reflects growing confidence in the US economy and the attractiveness of its sovereign debt instruments in the global market.
U.S. Treasury bond holdings rose to $8.339 trillion in July from $8.211 trillion in June.
Although Japan has reduced its purchases of US bonds, it remains the largest foreign holder of US Treasury securities. China is next. The mention of these two countries is an example of which major world powers are interested in this type of investment, which is almost always classified as safe.
Here is a chart of the 10-year US bonds, their performance over the past week and their price up to yesterday. Source: Yahoo Finance.
This gradual increase continues to exceed analysts’ expectations, which is very striking. Below we break down, point by point, the aspects, or reasons, that are considered decisive for US bonds to be chosen as a safe haven.
Factors driving foreign demand
Attractive returns
US Treasury bonds offer relatively attractive yields compared to other fixed-income assets from developed economies. This yield differential attracts international investors seeking higher returns with a perceived low risk.
Security and liquidity
Foreign investors view U.S. Treasury bonds as a “safe haven” during periods of global economic uncertainty. The depth and liquidity of the U.S. debt market allows investors to enter and exit positions with ease.
Portfolio diversification
Foreign fund managers and banks use Treasury bonds as a diversification tool in their investment portfolios. Exposure to US debt helps balance risk and potentially improve risk-adjusted returns.
Confidence in the US economy
The rise in foreign holdings reflects confidence in the strength and resilience of the US economy. International investors view the United States as an attractive destination for their capital, supported by a solid institutional framework and a fully developed financial market.
Implications for the US economy
Strong foreign demand helps the United States finance its budget deficit, which remains at elevated levels. This sustained demand allows the Treasury to issue debt at relatively low interest rates, reducing the cost of debt service for the government.
Foreign interest in Treasury bonds also helps maintain the strength of the U.S. dollar as a global reserve currency. This steady demand for dollar-denominated assets helps stabilize the exchange rate and reinforces the dollar’s role in the international financial system.
On the other hand, it must be taken into account that the Federal Reserve must take into account foreign demand for Treasury bonds when formulating its monetary policy. Strong international demand can influence long-term interest rates, potentially affecting the effectiveness of monetary policy decisions… that is why it is necessary, at all times, to maintain a balance in order to foresee whether to issue more or fewer bonds from a country, in this case the United States.
Risks and future considerations
Dependence on foreign investors
The growing reliance on foreign investors to finance U.S. government debt poses potential risks. A sudden reduction in foreign demand could put upward pressure on interest rates and increase borrowing costs for the government.
Changes in global economic conditions
Factors such as fluctuations in exchange rates, changes in the monetary policies of other central banks or geopolitical events could affect the relative attractiveness of U.S. Treasury bonds to foreign investors.
Competition from other safe assets
As other developed economies issue sovereign debt at competitive yields, foreign investors may diversify their holdings beyond US Treasuries. This could reduce relative demand for US debt in the future.
Conclusion
The record rise in foreign holdings of US Treasury bonds underscores continued global confidence in the US economy and the attractiveness of its sovereign debt instruments.
This sustained demand provides significant benefits to the United States, facilitating the financing of its deficit and supporting the dollar’s position as the world’s reserve currency.
However, policymakers and market participants must remain alert to the potential risks associated with this reliance on foreign investors.
Prudent management of public debt, coupled with sound economic policies, will be crucial to maintaining the confidence of international investors and ensuring the long-term financial stability of the United States.
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