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Wealthy Foreign Buyers Flock to US Debt Amid Trade Turbulence

HomeWealthy Foreign Buyers Flock to US Debt Amid Trade Turbulence

Wealthy Foreign Buyers Flock to US Debt Amid Trade Turbulence

Wealthy Foreign Buyers Flock to US Debt Amid Trade Turbulence

Summary

Foreign holdings of U.S. Treasuries surpassed $9 trillion for the third consecutive month, according to data released by the Treasury Department on Thursday. The increase in foreign investment in U.S. government debt marked a significant recovery from the outflows seen in April, which were triggered by tariff turmoil led by President Donald Trump's back-and-forth policy.

Foreign Holdings of U.S. Treasuries Hit Record High

The data revealed that foreign holdings of U.S. Treasuries rose to $9.045 trillion in May, representing a 11.2% increase from the same period last year. This marks the third consecutive month that foreign investors have topped the $9 trillion mark, with March witnessing a record high of $9.049 trillion. The significant growth in foreign investment demonstrates the enduring appeal of U.S. government debt globally.

Transactions Basis Showd Foreigners Buying $146 Billion Worth of Treasuries

A closer examination of transactions data highlights that foreigners purchased $146 billion worth of U.S. Treasuries in May, representing a substantial recovery from April's outflow of $40.8 billion. The massive purchase has not been witnessed since August 2022, indicating a significant rebound in foreign investor confidence in the U.S. government debt market.

Reduction in China Holdings Accelerates

China, one of the top Treasuries holders, continued its downward trend in May, reducing its holdings to $756.3 billion. This represents a decrease for the fourth consecutive month and marks a far cry from its peak between 2012 and 2016 when it exceeded over $1.3 trillion. China's decision to reduce its holding can be attributed to its efforts to bolster its currency, the yuan.

Reasons Behind China's Reduced Holdings

Analysts have provided insights into the possible reasons behind China's reduced Treasuries holdings. A slowing Chinese economy, post-COVID industrial challenges, and trade barriers are leading to reduced dollar inflows from exports. This development highlights the complexities of global economic interdependencies and the impact on foreign investment in government debt.

UK Investors Surpass China as Second Largest Owner of U.S. Government Debt

In a significant shift, UK investors now hold the record for being the second-largest owner of U.S. Treasuries, surpassing China's holdings in March. The UK has long been associated with being a custody country and is generally seen as a proxy for hedge fund investments.

Canadian Inflows Revive After April Outflow

A notable recovery was witnessed by Canada, where its Treasuries holding rose to $430.1 billion from $368.4 billion. This change in holding levels indicates a reversal of fortunes after being the biggest sellers of U.S. government debt in April due to tariffs imposed on its steel, aluminum, and automobile exports.

Recapitalization of US Equities

Foreign investors displayed renewed confidence by pouring more funds into the U.S. equities market, with massive inflows totaling $114.3 billion in May compared to an outflow of $18.8 billion in April. This marked a notable turnaround from the previous months and underscores the appeal of long-term investments in the U.S.

Record Net Capital Inflows

Data showed that net capital inflow into the United States reached a staggering $311.1 billion in May, surpassing April's record outflow of only $14.6 billion and constituting the largest monthly inflow since September 2024. Including adjustments for foreign portfolio acquisitions, estimated foreign transactions brought about a cumulative long-term record of $259.4 billion.

Conclusion

The most recent data released from the Treasury Department highlights a significant increase in foreign holdings of U.S. Treasuries. The $9 trillion threshold has been surpassed for three consecutive months, indicating an enduring demand for U.S. government debt worldwide. While China's efforts to bolster its currency have led to a reduction in its Treasuries holdings, other countries such as Canada and the UK are experiencing increased investments in U.S. government debt. These trends highlight the global interplay of economies and markets underlining the importance of foreign investors' role in shaping the demand for long-term security in international financial flows.