The World’s Two Biggest Treasury Buyers Take a Backseat

Bond Backstep

What do China and the Federal Reserve have in common? They’re the two biggest buyers of U.S. Treasury securities. But as of late, they haven’t been buying them as they used to.

For example, the Federal Reserve, which was buying bonds to support the economy during Covid and expanded its balance sheet to nearly $9 billion, has slashed its bond holdings by $650 billion over the last year. (It did so by letting bonds mature, rather than selling them into the market.)

Meanwhile, China’s official holdings receded by more than $50 billion in the same period — and $300 billion since 2021. Selling some of its holdings may support its currency and economy, while U.S.-China relations remain somewhat rocky.

Yielding Problems

So what does this mean for the Treasury market and why should it matter to investors?

For one, with the two biggest buyers on the bench, demand is lower. Higher yields might entice investors but they would also make it more expensive for Washington to borrow money. That’s uncomfortable as the nation’s debt pile was 94% of GDP in 2022.

Yields have already risen in response to the Fed’s stance that interest rates will likely remain higher for longer, as well as geopolitical pressures. After all, Treasuries remain a safe haven investment that people flock to during times of trouble.

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