By Vaibhav Tandon

Last month, we highlighted the risk that U.S. Treasuries could fall out of favor with foreign buyers as a result of policy uncertainty in Washington.  While the volatility of American decision-making remains high, U.S. public debt is still very much in demand.  Total foreign holdings of Treasury securities remain near a record high at $9.01 trillion in April. 

That said, the data illustrates a clear shift in the composition of holdings.  For the first time in two and a half decades, the U.K. has surpassed China to become the second largest foreign holder of U.S. government bonds, with ownership of a little over $800 billion.  

U.S. Treasury data combines both public and private buyers in the country-level summary.  While foreign governments and central banks remain key holders of U.S. public debt, the role of private investors or global financial institutions is growing.  Foreign private investors currently hold a larger amount of Treasuries than their official counterparts. 

Unlike the case of Japan, the rise in U.K. holdings is not driven by trade surpluses.  London’s role as a global financial hub has led to the persistent increase, as British institutions hold a significant amount of U.S. sovereign debt for their clients. 

Persistent political uncertainty coupled with lingering fiscal concerns in Britain in recent years have likely driven pension funds and banks toward U.S. Treasuries as a safer investment option.  Japanese institutions have continued their pursuit of higher and stable returns, given the persistently low yields on domestic sovereign debt.

While nations and investors may continue to fine-tune their strategies in response to evolving market and geopolitical realities, U.S. public debt is likely to remain a benchmark that anchors global fixed-income markets.  As long as the dollar perseveres as the world’s reserve currency, the benefits of holding this highly liquid asset will prevent a large-scale exit.  Of course, the U.S. must do its part to preserve confidence in Treasuries.  As much as foreign investors need the safe haven asset, the U.S. also needs foreign investors to fund its rising deficit.