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AS global central banks’ appetite for US government debt has flat-lined over the past decade, private foreign investors have filled the gap. But their appetite may be waning as well.
With long-dated US yields hitting their highest levels in nearly two decades, this is the last thing Washington needs.
The latest Treasury International Capital (TIC) flows data show that net buying of US Treasury notes and bonds by foreign private-sector investors fell to US$16.6bil in June, the lowest level since January.
One should never put too much store in one month’s data, of course, but in the 12 months through June, net purchases of Treasuries by private foreign investors declined by more than 40% from the same period last year to US$329bil.
Far from a one-off, that looks like a growing trend.
Unfortunately for the Treasury, this slump in private foreign bond purchases is running in parallel with continued net selling by the official sector, whose net sales hit nearly US$10bil in June.
Official sector selling has been slowing, with central banks and reserve managers unloading a net US$35bil of notes and bonds in the year through June, compared with US$91bil in the same period last year.
But it may have picked up again.
That’s because some central banks are looking more favourably at gold once again, while others, like Japan, have been intervening in the foreign-exchange market to support their domestic currencies.
Data on foreign-owned Treasuries held at the New York Federal Reserve (Fed) suggest an uptick in Treasury sales is occurring – custody holdings are at a 14-year low of US$2.6 trillion.
The tide isn’t expected to turn any time soon. Analysts at JPMorgan have lowered their outlook for total foreign purchases of Treasuries this year to US$450bil from US$500bil.
Given that net inflows from abroad in the first half of the year have totalled only US$178bil, there is some downside risk to that forecast, they noted.
The catalysts for this sharp dip in demand are likely varied, including doubt around the Fed’s commitment to getting inflation back to 2%, and worries about the US fiscal outlook.
Also, bond yields have been hitting multi-decade highs across the developed world, giving overseas investors more incentive to keep their money at home.
Uneasy times
But whatever the cause, the trend is worrying for a US government facing the prospect of ever-higher borrowing costs on a debt load of around 120% of gross domestic product.
Analysis of the fixed income side of TIC flows usually focuses on demand for long-term securities like Treasuries.
But alarm bells are also ringing at the ultra-short end of the curve.
The latest TIC data show that overseas private investors in June bought just US$6.6bil of US debt maturing in one year or less, so-called T-bills, bringing cumulative 12-month T-bill purchases to US$48bil, down 64% from the 12 months ending in June 2025.
The official sector figures are even more extraordinary. Central banks reduced their holdings of T-bills by US$35.6bil in June, right on the heels of a record US$61bil reduction in May.
In the 12 months through June, the overseas official sector unloaded a net US$42bil in T-bills, versus net purchases of US$134bil in the same period a year earlier.
This selling has reduced foreign ownership of all T-bills outstanding to 5.4%, according to JPMorgan, the lowest since December 2024.
This emerging trend won’t sit well with officials in Washington, given that the Treasury is funding an increasing share of its ballooning debt via bill issuance.
It’s now rolling over more than half a trillion dollars a week.
That means evaporating overseas demand could, on the margins, put upward pressure on bill yields.
Equities on a high
However, for every cloud, there is a silver lining.
While foreign demand for US debt may be decidedly lukewarm, it is red hot for US equities.
The overseas private sector bought a record US$144.7bil of stocks in June, lifting net purchases in the 12 months through June to US$805bil. That’s up 26% from a year earlier.
Central banks, meanwhile, bought US$36.7bil of stocks in June, bringing their cumulative 12-month total to US$114.3bil.
That’s a staggering increase from the US$1.7bil cumulative inflow in the previous 12 months.
While rising US yields may eventually make US debt attractive enough to entice foreign buyers, the cloud hanging over foreign demand isn’t lifting yet.
In fact, it appears to be darkening. — Reuters
Jamie McGeever is a columnist for Reuters. The views expressed here are the writer’s own.
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