Wednesday, September 20, 2023
It’s been little over a month since rating agency Fitch downgraded U.S. government debt from its highest rating (AAA) to its second highest rating (AA+). Among other reasons, the agency cited “a high and growing general government debt burden” as a reason for the downgrade. If hoping the downgrade would serve as a wake-up call to Washington, it hasn’t. Since the debt ceiling debate was resolved back in June, the Treasury department has steadily increased the amount of Treasury debt outstanding. As of September 18, total debt outstanding stood at $33 trillion, which is up from the $31.5 trillion right before Congress gave the Treasury Department unfettered borrowing capacity until January 2025. Now, to be fair, only $26 trillion of that is held by the public (with the rest held within the U.S. Government). But the congressional budget office expects total Treasury debt held by the public to grow to over $46 trillion by 2033. With so much Treasury debt expected to come to market over the next decade, it raises the question—who is going to buy all that debt?
As seen in the chart below, the current Treasury buyer base is diverse, with non-domestic buyers and the Federal Reserve (Fed) serving as the largest owners of Treasury securities. However, the Fed is in the process of shrinking its sizable balance sheet and is letting $60 billion of Treasury securities roll off each month (though debt that matures above the $60 billion threshold is currently being reinvested in Treasury securities). And the two largest non-domestic holders, Japan and China, have been reducing their holdings with both countries seeing their share of Treasury securities shrink by $100 billion and $256 billion, respectively, since 2020. And while Japan ($1.1 trillion) and China ($821 trillion) are still sizable holders of Treasury debt, it’s unclear if either country will be buyers of Treasury debt anytime soon.
That said, household investors and mutual funds (both areas with a pattern shade) have both been increasing their ownership in Treasuries. Additionally, according to the most recent Treasury data, foreign investment in Treasury securities have increased since 2020, despite the largest holders reducing their share. The United Kingdom (added $212 billion since 2020) and Canada (+$136 billion) have both been meaningful buyers of late.
Bottom line, as long as U.S. Treasury securities are regarded as risk free securities, there is always going to be demand for Treasuries. And with Treasury yields at the highest levels in decades, we could see that demand increase as well. In fact, it has to, otherwise the Treasury department could have a supply/demand problem on its hands.
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