Big recent moves in U.S. government bond yields reflect in part a new financial reality: Foreign governments are far less willing to finance American budget deficits than they used to be.
Why it matters: The U.S. Treasury market's role as the place where foreign governments socked their cash for safekeeping conferred huge advantages on the U.S. government and economy and kept borrowing costs lower than they would otherwise be.
The latest: After a sharp selloff in long-term U.S. debt, the Treasury Department said it would increase buybacks of such debt.
What they're saying: The move helped stabilize the bond market and lowered yields, but it may also create other risks, analysts say. "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," wrote analysts at Evercore ISI. "We believe this is in response to long-end yields reaching their pre-[financial crisis] peaks amid a Fed that is still on hold," wrote analysts with BNP Paribas, adding later: "We do not believe buybacks will be enough to offset a continued loss in Fed credibility."
Reality check: This likely won't be the last skirmish between the Trump administration and a bond market that's jumpier and more attuned to risks than it was just a few years ago. That's in part because the makeup of the Treasury market's investor base has changed. Official foreign entities like central banks, finance ministries and sovereign wealth funds hold in aggregate some 12% of U.S. Treasury securities, down from roughly 40% during and after the financial crisis.
How it works: Those entities didn't view their Treasury holdings as money-making investments so much as vehicles to safely store trillions of dollars of cash. In other words, they were using the Treasury market as a kind of insanely large bank account. And like regular folks with bank accounts, their prime concern had been about safety, security and ease of use. The interest rate was secondary. These foreign investors were often referred to as "price insensitive," which is remarkably handy when you're trying to find buyers for trillions of dollars of IOUs.
The intrigue: Those attitudes have been changing in recent years. A retreat in the overall share of foreign government holdings of Treasurys started to gather steam in 2016, when China began to liquidate its hoard of Treasury debt as it sought to defend its currency during economic trouble. The decline accelerated during COVID as world leaders also sought to swap their Treasurys for cash to help pay for the costs of the pandemic, while the level of overall U.S. government debt grew sharply. Russia's war on Ukraine, launched in 2022, added to the pressure as well, as the freezing of Russian state assets made countries second-guess their decisions about using dollar-based assets as places to store national wealth.
Yes, but: While there has been a shift in the behavior of foreign governments, they haven't dumped their Treasury holdings en masse. In the aggregate, holdings have stayed stable for years, in terms of levels, at just under $4 trillion. But their share of the Treasury market has plunged as the total amount of U.S. government debt has exploded, recently hitting $40 trillion — about 120% of GDP.
The bottom line: As foreign government buyers have stepped back, more of the market has been left in the hands of traders and investors like hedge funds, who have little in common with safety-focused government reserve managers.