Overseas investors and some foreign governments are reducing their holdings of US Treasury bonds. The mainstream media is making a big deal out of this and wants us to believe that it’s happening because Donald Trump is the President.
Yet there’s a problem with that analysis. The unloading of Treasuries began last summer when the polls showed that Hillary Clinton would win the November election in a landslide. As is often the case, the media got it all wrong. Trump is not the reason foreigners are reducing their holdings of US Treasuries and other so-called “safe assets” around the world.
Most foreign investors are shaving their holdings of US Treasury bonds, German bunds and other high-quality assets because they expect interest rates to rise – which causes the value of bonds to decline.
Total US debt is almost $20 trillion; of that staggering amount, apprx. $14 trillion is “debt held by the public” and the other apprx. $6 trillion is in so-called “intra-governmental” holdings.
From Tokyo to Beijing to London, the consensus is clear: fewer overseas investors want to step into the nearly $14 trillion publicly-held US Treasury market right now. Whether it’s the prospect of bigger budget deficits and rising inflation under President Trump, or higher interest rates ahead from the Federal Reserve, the world’s safest debt market seems less of a sure thing — particularly after the upswing in yields since November.
Of course, nobody is saying that foreigners will abandon Treasuries altogether. No way. After all, they still hold nearly $6 trillion, or roughly 43% of the US government debt held by the public market. But purchases are falling as shown above.
Fortunately, domestic demand for US Treasuries has increased significantly of late and has been more than enough to absorb the decrease in overseas demand. As a result, yields on benchmark 10-year Treasury notes have come back down after rising somewhat late last year. After rising to 2.64% in mid-December, yields on 10-year Treasuries are below 2.40% today, and are essentially flat over the last year.
Nevertheless, any consistent drop-off in foreign demand could have lasting consequences on America’s ability to finance its debt cheaply, particularly in light of Trump’s ambitious plans to boost infrastructure spending, cut taxes, rebuild the military and other new spending, which could increase budget deficits.
The president has singled out Japan and China, the two biggest overseas creditors, for devaluing their currencies to gain an unfair advantage in trade. That argument is debatable, but I’ll leave that discussion for another day.
In December, Japanese investors reduced their investments in US debt by $21.3 billion after a smaller pullback in November. While that’s only a fraction of Japan’s $1.1 trillion of holdings, the recent sales were the first back-to-back monthly declines since the start of 2014.
China, which owns just over $1 trillion of Treasuries, has been selling since May. Its holdings are at a seven-year low, as the media continues to warn. But the fact is, China is selling dollars and buying its own currency in an effort to support its flagging economy. This is also nothing new.
And it’s not just Japan and China who are reducing their holdings of US Treasuries of late. Take Saudi Arabia, for example, as a country which is heavily dependent on its trade relationship with the US. Saudi Arabia’s holdings of US Treasury securities fell to the lowest level since the summer of 2014 last year.
The mainstream media would love for us to believe that the drop in foreign holdings of US Treasury debt is the result of the election of Donald Trump, but that’s hardly a major issue.
The fact is, foreign governments are reducing their holdings of US Treasury debt because they believe the Fed is going to raise US interest rates in the months, and maybe years, ahead. If US interest rates rise, this will mean losses for US Treasury securities.
When US interest rates go up, the values of bonds go down. It’s as simple as that. Don’t believe the media when they tell you that foreigners are shunning US bonds because of Donald Trump. This trend evolved last summer when Hillary was widely expected to be our next president.
It’s nothing more than that, really. Ignore the mainstream media, as usual. They will blame everything possible on Trump for the next four years.
Bottom line: Should we be worried that foreigners are reducing their holdings of bonds, including US Treasuries? The answer is NO.