U.S. Treasurys Are Losing Reliable Buyers. Foreign Governments Retreat From American Debt.

The United States has spent decades relying on foreign governments to buy its debt with relatively little concern about the price. That era may be fading, potentially making it more expensive and more volatile for Washington to finance a federal debt load that has now reached $40 trillion.

Foreign central banks, finance ministries and sovereign wealth funds once represented one of the most dependable groups of buyers in the U.S. Treasury market. But their importance has fallen dramatically, a shift that is becoming harder to ignore as long-term Treasury yields rise and investors demand greater compensation for lending money to the federal government.

Official foreign institutions now hold about 12% of outstanding U.S. Treasury securities, according to an Axios analysis. The figure is down from roughly 40% during and in the years following the 2008 financial crisis.

The decline does not mean foreign governments have abandoned U.S. debt. Their holdings have remained relatively stable at just under $4 trillion. What has changed is the size of the market around them.

U.S. government debt has surged to approximately $40 trillion, equivalent to roughly 120% of gross domestic product. As Washington issues more debt and foreign official holdings fail to keep pace, those historically reliable buyers account for an increasingly small portion of the Treasury market.

That matters because central banks and other government institutions traditionally behaved differently from hedge funds, asset managers and other private investors. For many foreign governments, Treasurys were not primarily an investment designed to generate the highest possible return.

They were a place to park enormous foreign-exchange reserves in a market considered safe, liquid and easy to access. That made these institutions relatively insensitive to price and interest rates, an unusually valuable characteristic for a government issuing trillions of dollars in debt.

The shift has been years in the making. China began reducing its massive Treasury portfolio more aggressively around 2016 as Beijing used reserves to support the yuan during periods of economic and financial pressure. The COVID-19 pandemic accelerated the broader trend as governments around the world needed cash to finance emergency spending.

Russia's 2022 invasion of Ukraine created another complication. Western governments froze hundreds of billions of dollars in Russian central bank assets, prompting some countries to reconsider the geopolitical risks associated with holding national reserves in dollar-denominated assets.

The consequences are becoming more important as Washington confronts a more nervous bond market. Following a sharp selloff in longer-term government debt, the Treasury Department said Wednesday it would increase buybacks of long-dated securities, a move that helped stabilize the market and push yields lower.

But analysts cautioned that greater government intervention carries its own risks. According to Axios, Evercore ISI analysts warned that "Increased Treasury activism — if sustained — could also make the dollar less attractive, as investors may start to discount higher volatility and the risk of policy surprises."

BNP Paribas analysts said, "We believe this is in response to long-end yields reaching their pre-[financial crisis] peaks amid a Fed that is still on hold. We do not believe buybacks will be enough to offset a continued loss in Fed credibility."

The changing buyer base could make future episodes of bond-market turbulence more difficult to manage. When foreign governments represented a much larger share of the market, Washington could count on institutions that valued liquidity and security more than maximizing returns.

Increasingly, Treasury securities must compete for money controlled by hedge funds and other investors whose decisions are far more sensitive to yields, fiscal policy, inflation expectations and market volatility.