As global central banks’ appetite for U.S. 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 U.S. 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 U.S. Treasury notes and bonds by foreign private-sector investors fell to $16.6 billion 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 $329 billion. 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 $10 billion in June.
Official sector selling has been slowing, with central banks and reserve managers unloading a net $35 billion of notes and bonds in the year through June, compared with $91 billion in the same period last year. But it may have picked up again.
That’s because some central banks are looking more favorably 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 suggest an uptick in Treasury sales is occurring — custody holdings are at a 14-year low of $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 $450 billion from $500 billion. Given that net inflows from abroad in the first half of the year have totaled only $178 billion, 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 U.S. 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. But whatever the cause, the trend is worrying for a U.S. government facing the prospect of ever-higher borrowing costs on a debt load of around 120% of GDP.
DEBT CLOUD, EQUITY SILVER LINING
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 $6.6 billion of U.S. debt maturing in one year or less, so-called T-bills, bringing cumulative 12-month T-bill purchases to $48 billion, 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 $35.6 billion in June, right on the heels of a record $61 billion reduction in May. In the 12 months through June, the overseas official sector unloaded a net $42 billion in T-bills, versus net purchases of $134 billion 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.
However, for every cloud, there is a silver lining. While foreign demand for U.S. debt may be decidedly lukewarm, it is red hot for U.S. equities.
The overseas private sector bought a record $144.7 billion of stocks in June, lifting net purchases in the 12 months through June to $805 billion. That's up 26% from a year earlier. Central banks, meanwhile, bought $36.7 billion of stocks in June, bringing their cumulative 12-month total to $114.3 billion. That's a staggering increase from the $1.7 billion cumulative inflow in the previous 12 months.
While rising U.S. yields may eventually make U.S. debt attractive enough to entice foreign buyers, the cloud hanging over foreign demand isn't lifting yet. In fact, it appears to be darkening.
(The opinions expressed here are those of the author, a columnist for Reuters)
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