Factors Driving Declining Treasury Demand

📉 Foreign Ownership of U.S. Treasuries Is in Long-Term Decline Did you know that foreign investors currently hold ~33% of U.S. Treasury securities? That might sound significant — and it is — but its not just the level that matters, its the direction of travel: ➡️ A decade ago, that number was closer to 50%. ➡️ The share has been in a steady, structural decline since 2014. Why does this matter? 🌍 Global central banks are no longer the price-insensitive buyers they once were. 🇨🇳 Countries like China and Japan have reduced their exposure, citing diversification, rising hedging costs, and geopolitical risk. 📈 Meanwhile, domestic buyers — U.S. households, institutions, and the Fed — have picked up the slack. But with deficits rising and issuance ballooning, can domestic demand alone support the market? This trend has major implications: 1. Interest rate volatility may increase as the marginal buyer changes. 2. The bond market becomes more sensitive to shifts in domestic liquidity and risk sentiment. 3. And over time, it challenges the assumption that the world will always have an insatiable appetite for U.S. debt. Something to keep a close eye on. 📊 The structure of Treasury demand is evolving — and with it, the implications for interest rates, fiscal policy, and markets. #Macroeconomics #USTreasuries #Geopolitics #FiscalPolicy #Markets #Investing #Dollar #BondMarket #GlobalEconomy #USDebt

For the first time in history, the UK now holds more U.S. Treasuries than China. A symbolic shift—backed by a profound change in the geopolitical and financial landscape. The chart below shows China’s holdings of U.S. Treasuries falling steadily over the past decade, now dropping below $800 billion, while the UK has climbed past it with steady accumulation. Japan remains the top holder, but the broader message is clear: 📉 China’s strategic divestment reflects a longer-term move toward reserve diversification, de-dollarization, and geopolitical hedging. 📈 Meanwhile, the UK’s rise speaks more to its role as a financial center and perhaps custodial ownership. ⚠️ Combined with rising U.S. net interest costs (now projected to exceed 22% of tax revenue) and persistent fiscal deficits, this trend raises tough questions about Treasury demand resilience. Foreign demand for U.S. debt is no longer a given—and that shift has long-term implications for yields, the dollar, and policy flexibility.

For decades, U.S. Treasury demand has been shaped largely by foreign governments. China, once the second-largest holder of U.S. debt, has been steadily reducing its position, offloading $400B+ in Treasuries since 2013. Just this year, its holdings dipped below the $800B mark for the first time in over a decade. A new buyer has quietly emerged: stablecoin issuers. Today, major stablecoins like USDC and USDT are backed in part by short-term U.S. Treasuries. Tether alone reportedly holds over $90B in U.S. Treasuries. The marginal buyer of U.S. debt is shifting from nation-states to crypto-native private companies. This shift raises some provocative questions for the future of monetary policy, economic sovereignty, and risk: ➡️ Have stablecoins made a dent in foreign ownership? The data suggests yes. As foreign central banks de-dollarize or shift reserves, private sector demand is filling the gap. Stablecoins are unique in that they’re creating on-demand, decentralized dollar instruments that sit outside the traditional banking system. ➡️ Should we be more afraid of Circle owning Treasuries than China? It’s a fair question. At face value, private sector demand seems more market-driven and less geopolitically fraught. But concentration risk is real. If one issuer were to collapse, there could be sudden, sizable liquidity shocks in the short-term Treasury market. ➡️ How does this impact interest rates and policy? Stablecoins may act as a buffer, keeping demand for Treasuries high even as traditional buyers back away. That could help to keep yields low, but it may have unforeseen impacts on the Fed's monetary toolkit. As Bloomberg's Matt Levine recently wrote, stablecoin issuers function like narrow banks, entities that park deposits in U.S. Treasuries and reserves at the Fed but don’t make loans. This model contrasts with the traditional financial system, where banks use deposits to fund lending, a key mechanism for economic growth. If more dollars migrate to narrow-bank-like structures, it could shift how credit is created and overall liquidity. This isn’t just about crypto, it’s about who holds the power to drive demand in a $28T market. As seen below, the Treasury holdings of players like Tether.io and Circle are already almost on par with the largest global banks. As stablecoins become more deeply embedded in global markets, it’s worth asking: What frameworks, if any, should exist to ensure transparency in reserves, resilience in liquidity, and accountability from issuers? At Loop Crypto, we are focused on the utility of stablecoins as a payment mechanism. The scalability of this new rail is tied to the underlying trust individuals place in these digital dollars. The infrastructure behind the dollar is rapidly evolving. The question isn’t if crypto will shape global capital flows, it’s how, and who benefits. What’s your take on this emerging shift in Treasury ownership? #Stablecoins #USTreasuries #CryptoPolicy #Fintech

Goldman Sachs' Head of US Rates Strategy, William Marshall: "The impact of tariff policies could complicate the case for owning Treasuries as a hedge against volatility, given the possibility that tariffs could drive down growth while boosting inflation. This broad-based approach that we saw in terms of tariff policy introduced real concern that foreign investors might meaningfully pull back their support for Treasuries in aggregate. Given these cross currents, I think it’s useful to bear in mind that where the US is looking at potentially a very large inflation hit coupled with meaningful growth downside risks, outside the US, the balance skews a little bit more to the growth side of things." Investors had been focused on how much money tariffs could raise for the US budget (and therefore a potential reduction in the supply of government debt), they now seem to be more concerned about the prospect of a downturn, which could lead to higher government borrowing due to lower tax receipts and increased spending needs. This has been reflected in Goldman Sachs Research’s Treasury convenience factor, which measures the relative valuation of Treasuries versus alternative forms of duration such as swaps or other sovereign bond markets. A lower convenience yield usually reflects a less favorable supply/demand balance for US Treasuries (or investors anticipating a shift in that direction). The Treasury convenience yield fell sharply in April as trade tensions between the US and some of its biggest trading partners increased. https://lnkd.in/eX_pg4G7 #fiscalpolicy #taxcuts #deficits #budgetdeficit #inflation #treasuries #interestrates #economicgrowth #tariffs #tradepolicy #volatility #hedging #portfoliomanagement #riskmanagement #consumerspending #taxes

📉 𝗪𝗵𝘆 𝗥𝗶𝘀𝗶𝗻𝗴 𝗚𝗼𝘃𝗲𝗿𝗻𝗺𝗲𝗻𝘁 𝗗𝗲𝗯𝘁 𝗛𝗮𝘀 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝗪𝗮𝘁𝗰𝗵𝗶𝗻𝗴 𝗟𝗼𝗻𝗴-𝗧𝗲𝗿𝗺 𝗥𝗮𝘁𝗲𝘀 The U.S. federal debt has recently surpassed $35 trillion, marking a significant milestone that has far-reaching implications for investors. As of July, this debt equates to over $100,000 per citizen, reflecting an increasing federal debt-to-GDP ratio now at 122%. Key Points to Consider: 1. 𝗗𝗲𝗯𝘁 𝗚𝗿𝗼𝘄𝘁𝗵 𝘃𝘀. 𝗚𝗗𝗣 𝗚𝗿𝗼𝘄𝘁𝗵: The federal debt is growing at around 7.7% annually, while nominal GDP grows at 5.4%. This disparity suggests that the debt-to-GDP ratio will continue to rise, potentially exceeding 150% by 2030. 2. 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗣𝗮𝘆𝗺𝗲𝗻𝘁𝘀 𝗦𝘂𝗿𝗴𝗲: Quarterly interest payments on federal debt have now surpassed $1 trillion, up from 1.22% of GDP in 2015 to 2.41% at the end of 2023. This figure is projected to reach 3.6% by 2033, comparable to current defense spending. 3. 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗥𝗮𝘁𝗲𝘀: With increased debt issuance and stagnant revenue, interest rates are expected to rise over the long term. The Federal Reserve's quantitative tightening and increased debt supply will likely exert upward pressure on rates. 4. 𝗗𝗲𝗰𝗹𝗶𝗻𝗶𝗻𝗴 𝗙𝗼𝗿𝗲𝗶𝗴𝗻 𝗗𝗲𝗺𝗮𝗻𝗱: Foreign investment in U.S. Treasuries has decreased from 58% in 2008 to 33% as of mid-2024, influenced by global yield differentials and deglobalization. 5. 𝗙𝘂𝘁𝘂𝗿𝗲 𝗣𝗿𝗼𝗷𝗲𝗰𝘁𝗶𝗼𝗻𝘀: The CBO estimates the federal debt could reach $52 trillion by 2033. While immediate rate reductions may be on the horizon, investors should be prepared for longer-term pressures on rates due to rising debt levels. As we navigate through current monetary policies and economic conditions, understanding these long-term debt dynamics is crucial. It’s a reminder that while short-term factors may influence rates now, underlying debt trends will play a significant role in shaping the future landscape.

Despite some short-term relief from month-end rebalancing, we believe that government bond yields face upward pressure over the medium term from a supply/demand perspective. There are two duration shifts that present a headwind for government bonds over the medium term. The first duration shift has been taking place in demand and has to do with the retail impulse into bonds. The YTD pace in bond funds is tracking pace of around $450bn-$500bn, a sharp decline from the $1.36tr seen in 2024. The picture looks even more problematic for bond demand if one takes into account the duration impulse. Not only have bond fund inflows slowed sharply this year relative to 2024 but these inflows have shifted away from longer duration government or corporate bond funds towards short duration funds. In other words, there has been an even bigger decline in bond fund demand in duration terms. The second duration shift has been taking place in supply. While the duration impulse of corporate bond issuance has been flattening out as corporates reduced sharply the maturity of their issuance, the duration impulse of government bond issuance continues to rise widening its gap with corporate bond issuance. This is shown in the chart below which depicts the notional amounts of USD corporate bonds in 10y-equivalent terms along with the equivalent metric for the Treasury excluding Fed holdings. In other words, much of the duration supply has been stemming from government bonds rather than corporate bonds.

Rates drivers – Diminishing Treasury Demand In the intricate dance of global finance, a notable shift is underway as China and Japan reduce their holdings of US Treasury securities by approximately $424 billion since 2020. The Federal Reserve has stepped in, purchasing $654 billion worth, yet challenges persist. Japan's once-attractive carry trade is losing luster due to currency depreciation, while China's diminishing trade surplus with the US adds further complexity. Coupled with the Federal Reserve's Quantitative Tightening measures, this trifecta poses threats to future Treasury demand, especially as the US Treasury plans a significant uptick in borrowings. As financial landscapes evolve, astute investors must navigate these shifts in demand dynamics. Understanding the implications of reduced foreign holdings and the intricate interplay of economic forces is essential for informed decision-making. The era of diminishing Treasury demand calls for a strategic recalibration of investment approaches. #TreasuryDemand #GlobalFinance #InvestmentInsights

The End of Foreign Treasury Buying? Recent market turmoil has exposed up an uncomfortable reality – uncertainty over trade policy has called into question the extent of foreign demand for US Treasuries. Foreigners are the single largest investors in Treasuries as the dollar's reserve status and large foreign trade surpluses with the US led to a buildup of official FX reserves. Investors outside the US own 30% of all outstanding Treasuries. While this figure has declined in recent years (chart), foreign investors remain a key source of demand. In addition, foreigners own close to 45% of outstanding 7-10y notes, suggesting that any shortfall in demand may soon need to be addressed. While the May refunding announcement brought no change to auction sizes, Treasury may have to reassess the composition of its issuance over the longer term. A shift toward more domestic buyers may require Treasury to shorten the duration of issuance and rely more on bills as term premium increases and the curve steepens. Full note for clients: https://lnkd.in/eVFazmDH #trade #economy #growth #cpi #gdp #inflation #interestrates #treasuries #federalreserve #stocks #tdsecurities #tdstrategy

Bond ache and discipline. This week, markets sent a clear message: policy choices have consequences. What started as equity market jitters has turned into something more serious. Long-term US Treasury yields are surging, driven by concerns over rising deficits, persistent inflation, and waning demand for US debt. The “bond ache” is proving more powerful than an equity selloff: it’s triggering a broader policy reality check. One sign of that shift: the abrupt 90-day pause on new tariffs. Markets read it not as strategy, but as a retreat — a sign of how financial dysfunction is reshaping policy choices. James Carville (political advisor to former US President Bill Clinton) once said that if he could be reincarnated, he’d want to come back as the bond market—because then, you can intimidate everybody. This week, that line feels especially true. And here’s why: higher yields mean higher borrowing costs for the US government. It’s like taking out a mortgage: when interest rates go up, so do the payments. With trillions in outstanding debt, even a modest rise in rates translates into hundreds of billions in additional interest for new borrowing. That’s money that can’t go to infrastructure, healthcare, or defense. In short, the bond market is forcing policy discipline by making unsustainable policy choices more expensive. We’re witnessing a reassertion of discipline — not just from central banks, but also in fiscal and trade policy. Markets are drawing boundaries. And this time, they’re enforcing them through bond duration.

Why Japan and China Are Quietly Redefining the Global Bond Market The world’s two largest foreign holders of U.S. Treasuries are steadily pulling back, a shift that could have profound implications for global markets. As the chart illustrates, Japan and China’s combined share of foreign holdings of U.S. Treasuries has declined sharply over the past two decades. In 2004, they accounted for more than 40% of total foreign ownership. By mid-2025, that figure had fallen to just over 20%, with Japan at 13% and China near 8%. This is not a small adjustment; it represents a structural change in how the global savings surplus is allocated. For decades, Japan and China recycled their trade surpluses into U.S. debt, anchoring Treasury yields and reinforcing the dollar’s dominance. That relationship is now evolving as both nations redirect reserves toward domestic priorities and alternative assets, including gold and regional investments. History reminds us that shifts in reserve behaviour often foreshadow broader financial transitions. In the late 1960s, as European central banks reduced their dollar holdings, the groundwork was laid for the end of Bretton Woods and the revaluation of global currencies. Today, the underlying dynamics may be different, but the pattern, a gradual diversification away from U.S. paper, is strikingly familiar. For investors, this trend signals more than geopolitics. It suggests that one of the great stabilisers of bond markets may be stepping back just as U.S. fiscal pressures mount. The resulting balance between supply, demand, and confidence will define global capital flows for years to come. ➡️ Each Tuesday, I share a concise email commentary framing the behaviours and forces shaping global markets, designed for investors who want more than headlines. You can sign up for the free Tuesday Market Commentary and access sample issues of the Global Investment Letter here: 🔗 https://lnkd.in/g2mBz8fJ #geopolitics #globalmarkets #USdebt #globalinvestmentletter