Foreign Demand for U.S. Treasury Debt Falters, Trade Group Reports

Foreign Investors Diversify Away from US Treasuries Amid Rising Debt Levels

Foreign investors are showing signs of diversifying away from US Treasuries as debt levels mount, according to a report by the Institute of International Finance (IIF). The association, which represents about 400 banks, insurers, and asset managers, found that net purchases of US government debt by foreign investors have been stable this year.

Meanwhile, Japanese and European sovereign debt have seen increased accumulation by foreigners. The IIF report points to early signs of portfolio diversification, particularly in cross-border investments in government securities. This trend partly reflects diverging debt trajectories, as the US debt-to-GDP ratio is expected to continue rising while those in Europe and Japan are on a more moderate path.

The Treasury market has avoided liquidity stress, thanks to support from domestic demand. Additionally, foreign demand for US corporate bonds has been strong this year, despite the surge in oil prices since the end of February. The analysts at the IIF note that Middle East tensions have had limited spillovers beyond energy markets to date.

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In emerging markets, sovereign bond issuance has continued at a record pace. High-yield issuers like the Democratic Republic of Congo have sold global bonds for the first time in April. Ecuador is expanding two previous offerings, and Bolivia is expected to borrow in the coming days.

The analysts at the IIF warn that the conflict in the Middle East stands to increase the nearly $353 trillion global debt stock as higher energy and food prices force governments to borrow more and at higher cost. If the conflict persists, prolonged price pressures will feed through to borrowing costs, they note. The risks are real.