Foreign governments don't own as many Treasurys as they used to. That's pushing interest rates up
Interest rates have been rising in this economy for a whole bunch of reasons. The Fed has raised rates, for one, to try to deal with a persistent inflation problem. The federal government’s also piling on debt. So are data center developers and tech companies. And all of that borrowing demand is pushing bond buyers to demand higher interest rates.
There are also some undercurrents that’ve been putting upward pressure on rates for a while now. One of those is an exodus of foreign buyers from U.S. government debt. Back in 2008, they owned around 60% of it. Today, it’s just 25%.
Foreign ownership of U.S. debt skyrocketed in the 1990s and the 2000s, back when the U.S. buying a ton of imports.
“Emerging markets, especially China, were seeing very strong export growth,” said Alex Wolf, global head of macro and fixed income strategy with J.P. Morgan.
As a result, Wolf said those countries were generating ever-growing dollar reserves. And those countries’ central banks needed a safe place to stash away all those dollars.
“They more or less would take that surplus, and they would just park it into Treasurys,” Wolf said.
These countries bought Treasurys because they’re one of the safest assets on the planet. They’re also easy to sell. That allowed countries to treat their dollar reserves like emergency funds, said Anusha Chari, an economics professor at the University of North Carolina at Chapel Hill.
“A country that is, for example, oil dependent, needs to maintain buffers of dollar reserves to purchase oil,” she said. “That is a way in which you finance imports.”
Chari said some countries were also worried about their own currencies, especially after they tanked during the Asian Financial Crisis in the late 1990s. Having extra dollars around let a country buy more of its own currency to prop up its value and maintain its exchange rate.
“Countries that maintain fixed exchange rates need a buffer of reserves, in case foreign investors want to get out of their currency,” Chari said.
But more recently, she said, countries haven’t been as concerned about supporting their currencies, because their economies have been growing.
“Countries in Asia, for example, have just become a lot more resilient,” Chari said. “And the accumulation has basically stagnated.”
Some countries have slowed down Treasury purchases, including Japan. Others have been selling Treasurys, including China and Russia.
“We see this weird state where Treasuries have lost their ‘specialness’ within the space of dollar assets,” said Jesse Schreger, a professor at Columbia Business School.
That special role Treasurys used to play for foreign countries allowed the U.S. government to pay lower yields on its debt, since those foreign central banks that were buying it up didn’t really care about the interest rates they were getting paid.
“And so you’re willing to basically say, you know what, I’m going to earn less of a return on that asset, in order to get the convenience of being able to actually turn it into the things that they need at a moment’s notice,” Schreger said.
But now that foreign central banks don’t need to stockpile as many Treasurys, they’re starting to look more like any other financial asset.
“If you’re just another financial asset, that investors are trying to maximize your returns on, the only way in which you can induce investors to actually buy more of you is you can either get safer, or you can pay a higher yield,” Schreger said.
It doesn’t help that the federal government has been borrowing more over the past 15 years.
“Now, as the U.S. contemplates borrowing more and more, it doesn’t get to actually get that discount,” Schreger said.
Which means neither do mortgage holders, auto loan borrowers, or anyone else with a loan that’s tied to Treasury yields.