Foreign governments pulled back their purchases of longer-term U.S. debt as trade tensions escalated around the world.
The declines are relatively small so far for notes and bonds — just shy of $5 billion each for March and April, the most recent months for which Treasury data are available — but it signals a potentially troubling trend.
“We need all the help we can get in the search for buyers of US Treasuries due to the enormous supply coming our way in the next few years,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in a note. “Our stance on trade with our trading partners could very well play into this in coming months and quarters, especially with China, the largest owner of US Treasuries.”
President Donald Trump‘s administration has been in a tit-for-tat battle of tariff threats with multiple U.S. trading partners, particularly China.
In addition, Trump has threatened to pull out of multinational trade agreements like NAFTA, and has slapped tariffs on imported steel and aluminum.
One of the most glaring declines has come from Russia, which sliced its holdings of U.S. debt nearly in half from March to April, from $96.1 billion to $48.7 billion. Russia’s Treasury ownership peaked at $108.7 billion in May 2017.
In all, foreigners held $6.17 trillion of the total $14.84 trillion of Treasury debt outstanding through April. The national debt including intragovernmental holdings has swelled to more than $21 trillion.
Russia isn’t the only country cutting back in its U.S. holdings.
China, the largest owner of U.S. debt, reduced its level by $5.8 billion in April to $1.18 trillion, while Japan, the second largest, cut its holdings by $12.3 billion to $1.03 trillion. Ireland, the U.K. and Switzerland also pulled back.
When counting all securities (including T-bills), the April decline came to $47.6 billion, a 0.8 percent reduction from March.
Finding buyers for government debt has become increasingly important since the Federal Reserve halted its bond-buying program in October 2016 after swelling its holdings to more than $4.2 trillion.
Since October 2017, the central bank has been allowing a set level of proceeds it gets from those debt instruments to run off each month, while continuing to reinvest the rest. The Fed’s portfolio of Treasurys and mortgage-backed securities since then has declined by $116 billion, or 2.8 percent, while foreign holdings also have fallen off by 2.5 percent.
With the budget deficit expected to rise in coming years — passing $1 trillion in 2020, according to Congressional Budget Office estimates — the government has been issuing debt heavily. The total for 2018 has been $443.7 billion, a nearly ninefold increase from the same period a year ago and a 139 percent jump from 2016, according to the Securities Industry and Financial Markets Association.
At the same time, interest rates have been rising. The benchmark 10-year note yield is about three-quarters of a point higher than where it was a year ago. Through the first eight months of the current fiscal year, the U.S. has paid $319.3 billion in interest on its debt.