China Dumps More US Debt as Foreign Holdings Hit Record High

Dollars are counted next to stacks of 100 yuan (RMB) bank notes at a bank in Huaibei, China, on Sept. 24, 2013. (STR/AFP via Getty Images)

Foreign holdings of U.S. debt rose to an all-time high in February, representing the fifth consecutive monthly increase, new Treasury Department data revealed on April 17. However, as global investors scooped up U.S. government bonds, China trimmed its exposure to dollar-denominated assets.

In total, foreign holdings were $7.965 trillion, up from $7.945 trillion in January. U.S. debt owned by foreigners also advanced by nearly 9 percent from the same time a year ago.

Belgium was the top market to expand its holdings of Treasurys by picking up about $27 billion and raising the total to $320 billion.

Japan continued to be the largest non-U.S. holder of Treasury securities, adding another $16 billion to $1.168 trillion, the highest total since August 2022.

France bought $16 billion, Canada purchased $14 billion, and the UK acquired more than $9 billion.

China dumped about $23 billion, reducing its holdings to a 14-year low of $775 billion. This is also down by close to 9 percent year over year. For the past couple of years, the world’s second-largest economy has gradually lowered its exposure to U.S. government bonds as part of diversification efforts and to prop up the struggling yuan renminbi.

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Other foreign markets to decrease their holdings were Switzerland ($27 billion), Hong Kong ($13 billion), and Norway ($6 billion).

Foreign investors, primarily governments and central banks, hold about one-third of U.S. debt.

Issuing More Debt

The federal government has been issuing enormous amounts of Treasury bills and notes to help manage the ballooning budget deficit and keep up with growing interest payments. Between January and June, the Treasury Department anticipates auctioning approximately $1 trillion in debt.

Domestic and foreign investment demand for Treasurys has been mixed this month.

The U.S. Treasury issued $13 billion in 20-year bonds, enjoying solid interest from investors who bought most of the supply. The April 17 auction also generated a yield of 4.82 percent, roughly 2 basis points lower than pre-auction trading.

Since 2022, the federal government has reduced the size of 20-year bond auctions amid lackluster demand for the instrument.

This comes one week after an abysmal auction to issue $39 billion in 10-year bonds. Primary dealers—mostly U.S. banks that scoop up the remaining supply—bought about a quarter of the debt and recorded a higher-than-expected yield of 4.56 percent. Market watchers say that this was one of the benchmark Treasury note’s worst performances in recent memory.

Experts purport that financial markets are signaling concern about the United States’ fiscal trajectory as the national debt topped $34.6 trillion and the budget deficit is already above $1 trillion halfway through fiscal year 2024. Long-term estimates suggest the country’s debt and deficits will deteriorate even further as higher interest costs and outlays outpacing revenues weigh on the U.S. government.

A plethora of experts, from economists to business leaders to public policymakers, have sounded the alarm regarding the nation’s unsustainable fiscal path.

International Monetary Fund heads have also weighed in on the issue, warning that “something will have to give” as the current U.S. position “is out of line with long-term fiscal sustainability.”

International Monetary Fund headquarters in Washington on Aug. 4, 2023. (Madalina Vasiliu/The Epoch Times)

The Washington-based institute noted in its latest World Economic Outlook and Fiscal Monitor reports that “this raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy since it risks pushing up global funding costs.”

While debt and deficits are capturing all the attention in Washington, interest payments are rising at an exceptional pace, exceeding $1 trillion per year and becoming one of the top budgetary items. Debt servicing payments have accelerated so much that nearly half of income tax receipts are allocated to interest costs.

Reading Tea Leaves

Nevertheless, domestic and international demand for the greenback has allowed the United States to finance its debt. For decades, investors worldwide have been holding dollar-denominated assets, such as Treasury securities, because of the U.S. debt market’s decades-long immense size, safety, security, and liquidity.

Global investors also view the United States as a superior option to park their savings. Despite recent adjustments to monetary policy, the Bank of Japan is still keeping interest rates low. The European Central Bank is widely expected to cut rates soon. These factors could bolster demand for Treasurys that are offering attractive yields.

Indeed, in recent months, higher yields have appealed to dividend-hungry investors.

The two-year yield recently surpassed the 5 percent mark for the first time since November 2023. The 10-year bond is trading at about 4.6 percent, while the 30-year bond stands at about 4.7 percent. The upward push has largely reflected shifts in Federal Reserve policy expectations.

After four straight hotter-than-expected consumer price index reports, the futures market has lowered its forecasts for the first rate cut. Many investors are pricing in a September cut, according to the CME FedWatch Tool.

Fed Chair Jerome Powell conceded on April 16 that the central bank may have to keep the policy rate higher for longer amid revived inflationary pressures.

“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence. That said, we think policy is well positioned to handle the risks that we face,” Mr. Powell said at a central bank policy forum.

“We can maintain the current level of restriction for as long as needed.”

While the Fed is still engaged in its balance sheet runoff campaign, recent Federal Open Market Committee meeting minutes reveal that officials are considering lowering the pace from $60 billion to $30 billion a month. If the monetary authorities follow through on these expectations, this could ease some of the upward movement in bond yields.

Ultimately, the federal government’s record issuance has raised widespread concerns that anemic debt sales will wreak havoc on financial markets and reinvigorate volatility similar to what occurred this past fall.

At the end of April, the Treasury will announce its plans for the third quarter. The markets will be paying close attention.