Key Takeaways:
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• Foreign investors hold $7.33 trillion in US debt, near record levels
• Global funds cite high yields and market liquidity as key attractions
• Incoming Treasury Secretary’s deficit reduction plans boost confidence
• Japanese investors earned 12% returns on unhedged Treasury investments in 2024
What Happened?
Despite warnings of a potential “death spiral” in US Treasury markets, major global investors are maintaining their strong positions in US debt securities. Foreign funds currently hold $7.33 trillion in long-term US debt, just below the record $7.43 trillion reached in September 2024. Major institutional investors, including Europe’s largest money manager and Asian pension funds, continue to express confidence in US Treasuries despite an historic bear market.
Why It Matters?
This sustained international confidence is crucial for US debt markets, as foreign investors hold about one-third of outstanding Treasury securities. The continued investment reflects several key factors: significant yield premiums over other markets, unmatched market liquidity, and dollar strength benefits. The nomination of Scott Bessent as Treasury Secretary, with his focus on deficit reduction, has further bolstered investor confidence. This global backing helps maintain stability in US government financing despite record deficit levels.
What’s Next?
Markets will closely watch the new administration’s fiscal policies and Bessent’s confirmation hearing. While some investors express caution over growing US debt levels, most anticipate an orderly adjustment in Treasury yields. Key factors to monitor include the implementation of deficit reduction plans, inflation trends, and Federal Reserve policies. Japanese and European investors particularly remain optimistic, though some are shifting toward shorter-duration holdings. The market’s response to upcoming Treasury issuances and deficit management strategies will be crucial for future yield movements and international investment flows.
