This article was originally published on ETFTrends.com.
While diminished foreign demand for U.S. government debt weighed on the Treasury market, the renewed interest among risk-adverse U.S. investors helped prop up Treasuries and bond-related ETFs.
According to the most recent Treasury data, foreign ownership of U.S. government debt has been falling since a peak of about 55% during the financial crisis in 2008 to below 40% in November for the first time since 2003, the Wall Street Journal reports.
China, the largest foreign creditor to the U.S., held as much as 14% of all outstanding Treasury debt back in 2011, but only currently owns a little more than 7% of U.S. debt.
Some observers have warned that government bond yields could jump if foreigners dumped U.S. debt holdings, which would in turn push up costs of other debt throughout the economy, like mortgages and business loans, hampering U.S. growth.
“The fears of the past were exaggerated,” Tony Rodriguez, who oversees taxable fixed-income investing at Nuveen, told the WSJ, adding that domestic investors could continue to buy a larger share of the government’s debt.
TLT ETF Attracts $2.2B Net Inflows
ETF investors have also exhibited a greater willingness to gain exposure to U.S. debt. For example, the iShares 20+ Year Treasury Bond ETF (TLT) was among the most popular ETF plays so far this year, attracting $2.2 billion in net inflows year-to-date, according to XTF data.
Furthermore, the Federal Reserve has been reducing its portfolio of government and mortgage bonds, which it hoarded in the wake of the financial crisis to bolster the economy. The actions have forced the Treasury to sell more to private investors. In 2018, the Treasury increased auctions of notes and bonds by about $335 billion to $2.36 trillion from $2.03 trillion. Meanwhile, foreign investors only bought a fraction of that increase, increasing purchases by $13 billion last year.
“As certain investors step back, other investors are willing to step in and buy,” Jon Hill, a government debt strategist at BMO Capital Markets, told the WSJ.
Specifically, domestic institutions and investors have been making up the difference in Treasuries demand. For example, U.S. households raised holdings of Treasury securities to $2.3 trillion at the end of Q3 2018 from $1.4 trillion in early 2017.
For more information on the fixed-income market, visit our bond ETFs category.
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