Who Will Buy U.S. Treasuries?

The $64 Trillion Question: With Foreigners Stepping Aside, Who Will Buy U.S Treasuries?

While there were many topics of discussion (discussed previously here), the TBAC highlighted two key areas of concern: i) the soaring US budget deficit, and specifically the possibility of significant financing gap over next 10 years amounting to over $12 trillion and the potential need for more domestic investor participation if foreign reserve growth slows; and tied to that ii) the worry that since "foreign investors already hold significant dollar debt", and have been paring back substantially on their Treasury purchases in recent years, the US will have to increasingly rely on domestic savings to fund its future budget deficits.

Of particular note, the TBAC said, tongue in cheek, that while the "USD is still the dominant reserve currency", reserve managers have been very gradually increasing allocation to other currencies, and that the USD share of FX reserves has steadily come down from 72% in 2000 to 62% now. 

Which brings up a key question: who is buying US Treasurys, and who will be buying US Treasurys for the foreseeable future.

To address just this question, on Friday Deutsche Bank's team of economists and credit strategists led by Peter Hooper, Brett Ryan and Torsten Slok among other, published a presentation titled "Who is buying Treasuries, Mortgages, Credit and Munis" which seeks to address just the concern framed by the TBAC, and which will soon emerge as the most critical one for the US Treasury market (the biggest in the world), especially if public support for MMT (i.e. helicopter money to finance unlimited political promises) gains social traction.

Which brings us to arguably the key chart which highlights the TBAC's main concern: whereas the US budget used be financed by foreigners, it is now financed almost entirely by domestic investors, as some of the largest US creditors such as China are quietly exiting stage left.

Meanwhile, as foreigners refuse to buy up any more US paper, in addition to the Fed rolloff, the relative share of Treasuries held by the Fed is declining, mainly due to the exploding Treasury supply.

And there it is: a long-form answer to a simple question - who is buying US Treasuries, even if the far more important answer of whether they will keep on buying these Treasuries, has yet to be answered.