US Treasuries Have Become Unappetizing for Foreign Central Banks and Governments

But opaque foreign financial centers pile on Treasuries, often held by US companies and hedge funds.

Treasury securities have lost their allure for foreign central banks and governments, whose holdings declined this year and in July dropped to $3.77 trillion at market value, roughly where they’d been in 2012, according to the Treasury Department’s TIC data.

But over this period, since 2012, the amount of Treasury securities outstanding has about tripled, according to the Dallas Fed market-value data (via St. Louis Fed). And inflation since 2012 was 48%. And the share of these “foreign official” holdings has collapsed from a share of 34% of marketable Treasury securities in 2012, and from a share of over 38% at the peak in 2007-2009, to a share of 12.8% in July, the lowest share since 1993.

There are three aspects to this:

Treasury securities have become increasingly unappetizing for foreign central banks and governments.

The US has become a lot less dependent on foreign central banks and governments to finance its massive out-of-control deficits.

The US has become more dependent on opaque foreign financial centers, where US hedge funds and companies keep their holdings.

Foreign holders in total – foreign official holders and foreign private holders – shed $50 billion of Treasury securities in July, bringing their holdings down to $9.25 trillion (red in the chart below). Those total holdings kept zigzagging higher over the years and reached a peak in February, driven by private foreign holdings.

Long-term Treasury notes and bonds accounted for $7.78 trillion, or about 84%, of the total foreign holdings (blue line). The rest were short-term Treasury bills.

But these private foreign holdings are not purely “foreign.” They include large amounts from US hedge funds that are domiciled in foreign financial centers, such as the Cayman Islands, a big favorite for hedge funds engaged in the highly leveraged Treasury basis trade that buy Treasuries, estimated at close to $2 trillion, and sell Treasury futures against them. This is the hot money in Treasuries, and back in March 2020, it caused the Treasury market to seize, an event that the Fed keeps nervously talking about. Only now, it’s a lot bigger.

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