The past week and a half has been especially turbulent for US Treasury futures. The failure of Silicon Valley Bank was due to a massive loss on the sale of $21 billion in bonds, most of which were Treasury securities. As risk anxiety spread from the US banking sector around the globe, expectations for upcoming Fed rate hikes were dialed back, and this sparked a massive rally in the Treasuries.
US Treasuries holdings saw a huge increase during the first half of 2020 when COVID shut down the US economy. As of Wednesday, there were roughly $31.459 trillion held. Of that amount, $6.805 trillion were considered intergovernmental holdings, which is debt that the US government owes to its own agencies, such as the Social Security Trust Fund or FDIC Deposit Insurance. This leaves $24.654 trillion considered debt held by the public.
The Treasury Department’s monthly Treasury International Capital report, more commonly known as the TIC report, shows the major foreign owners of Treasury securities. The report released this week showed foreign Treasury holdings at the end of January at $7.402 trillion. This was an $83.8 billion increase from December but a $253.4 billion decline from January 2022.
When the TIC reports are released, the market usually focuses Chinese and Japanese holdings, as both nations hold large amounts in US Treasuries. Chinese holdings fell last month, and they have declined in 13 of the last 14 readings. Japanese holdings showed a moderate increase in January and reached a four-month high. Together. China and Japan accounted for 27% of foreign Treasury holdings in January, down from 41% in January 2013.
Treasuries should continue to see safe-haven inflows during times of risk anxiety, but the upward trajectory of Fed interest rates over the past year has encouraged foreign investors to reduce their holdings. This factor could intensify the market’s focus on the FOMC’s economic forecasts and post-meeting comments this coming Wednesday. If the Fed maintains its hawkish tone, we could see a further decline in foreign holdings, which could extend the turbulent price action into the second quarter.
Originally Published March 17, 2023
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