US Treasury Debt Being Gobbled Up By Foreign Holdings

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The US Treasury announced today that total foreign holdings of US Treasury debt increased 0.8% in February reaching a new high of $5.89 trillion, the Associated Press reports, although China notably reduced its total holding of US Treasury debt while Japan accumulated even more US Treasury debt in February. (March numbers won’t be made available until mid-May.)

China became America’s largest creditor in 2008

China still owns more US Treasury debt than anyone else, $1.27 trillion after the 0.2% dip in February, but Japan has been gaining on it for the last few years and continues to close the gap with $1.21 trillion after a 0.8% increase. Japan had been America’s largest creditor until 2008 when it was surpassed by China, which has since pulled back on buying US debt.

Foreign residents were most interested in long-term US securities (including long-term corporate and government agency bonds), with net purchases of $84.8 billion in February, $66.3 billion coming from private foreign investors and $18.5 billion from official institutions. Foreign residents were also net buyers of shorter-term US Treasury bills, increasing holdings by $2.8 billion.

If you include the sale of foreign securities, the net flow of long-term securities from the US to foreign residents was $85.7 billion in February, which Treasury adjusts to $76.5 billion (to account for unrecorded principal payments and other discrepancies from the official number).

Over the same period, US residents were net sellers of long-term foreign securities, reducing holdings by $1.0 billion, and US banks’ dollar-denominated debt to foreign residents went up $86.7 billion, said the US Treasury statement.

Foreign interest in US debt remains strong

One of the main concerns during the debt ceiling debate last year was that if the US didn’t make promised payments on maturing notes and bonds, they might no longer be treated as risk-free returns by the market, which would drive up borrowing costs for the US in the future. Even though a compromise was reached at the time, many foreign investors were surprised that negotiations had gone essentially until the last hour, and future debt ceiling fights might dampen their enthusiasm for US debt.

But with a deal in place that should keep the government going until next March, there at least aren’t any immediate concerns about another partisan fight putting bond holders at risk, so foreign purchases of US bonds is expected to remain high for the rest of the year.

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