The year to date has seen extraordinary volatility in the US Treasury market as the mood has swung from fears of inflation (yields go up) to worries about recession (yields go down). But who are the largest holders of US debt? The chart below shows us that foreign investors held $7.3 trillion of the national US debt last year. These holdings declined 6% in 2022 amid a strong US dollar and rising rates.
Source: Visual Capitalist
US Treasury securities are amongst the most liquid asset markets worldwide and are used as a hurdle rate for determining investment risk. Central banks use US Treasuries for foreign exchange reserves and private investors flock to them during flights to safety due to their perceived low default risk.
Beyond these reasons, foreign investors buy Treasuries as a store of value. They are often used as collateral during international trade transactions, or countries can use them to help manage exchange rate policy. For example, countries may buy Treasuries to protect their currency’s exchange rate from speculation.
With $1.1 trillion in US Treasury holdings, Japan is the largest foreign holder of US debt. Japan passed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings, in four years. The offloading of US debt by China is one way it manages the yuan’s exchange rate. At the same time, China doesn’t solely use the US dollar to manage its currency – it now uses a basket of currencies. It is perceived to be in China’s strategic interest to weaken the US dollar’s dominance as the world’s reserve currency.
The UK is the third largest holder of US debt with about USD650 billion held in Treasuries. Australia is not a large holder and is only the 24th largest foreign investor with around USD57 billion held in US bonds (less than 1% of the total market).
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.
