Major foreign holders of US debt – including “official” buyers such as central banks and government organisations and private investors, have increased their holdings, despite by recent acceleration of growth rate of borrowing by the US government. According to TIC data (Treasury International Capital), published monthly by the Fed, foreigners in aggregate volume purchased bonds worth $253 billion for the period of April 2018 – April 2019, bringing their investment to $6.43 trillion in absolute terms.
However, it is clear that the true appeal of American debt for foreigners is revealed when comparing the relative growth rates of investment of this group of investors with the overall rate of growth of debt. Over the same period, foreign investment increased by 4%, while total debt increased by $960 billion to $22 trillion or in relative terms by 4.5%. Thus, the attractiveness of debt for foreigners has slightly decreased.
In the long term, the share of debt in foreign ownership is reduced from a peak of 34% in 2015 to 28.8% in 2019, which roughly reflects the tightening cycle of the policy initiated by the Fed at the end of 2015:
The two largest US lenders are China and Japan. Their “dependence” on the US debt is due to years of accumulated surplus in trade with the United States, which have been prudently “parked” in American risk-free papers. Over 12 months, China’s investment in debt declined by $ 69 billion to 1.1 trillion. In analyzing speculations about China manipulating its investments in American debt (leverage in a trade war, etc.), and about the concerns for de-dollarization, it is necessary to understand that there is an objective reason for fluctuations in the portfolio – they correlate well with the outbreaks of capital outflow in the PRC, as seen from the capital flight episode in 2016:
By selling liquid securities, China can use funds to stabilise the yuan.
Japan, being a political ally of the United States in Asia, is a “responsible investor” in American debt, and negative rates guarantee that this tool will be popular among Japanese institutional investors.
The share of other large investors in the US debt lags far behind China and Japan, but for many of them we can single out another objective reason for the popularity of American bonds – they enjoy the status of tax havens for private and corporate entities. Switzerland, Luxembourg, Cayman Islands, Belgium, Hong Kong – occupy the top lines in the list of investors. In Belgium, for example, Euroclear is located – a clearing center that manages significant assets of fiduciary accounts. The nature of these countries’ financial services implies particular emphasis on conservatism in investing, and their portfolio may be dominated by the most liquid assets, such as US bonds.
The rest of the increase in debt was assumed by government agencies and … no, not by the Fed, it now frees the balance sheet from the debt (although it owns a large portion). Institutional and private investors in the United States bought up $ 876 billion in bonds over the period, with banks generating the main demand ($ 500 billion), which lending activity is restricted by reserve requirement. Recall that part of the deposits that attract banks should be reserved (to meet the daily needs of investors to withdraw funds) in the form of vaults cash, or in the form of reserves in the Fed’s account, or … in highly liquid assets (HQLA assets) which are government bonds. This is a stable source of demand for US debt.
With a drop of bond yields to a recent 2.09%, it can be seen that despite high borrowing rates, US government debt is grabbed by investors like hot cakes.