Foreign buyers of U.S. government debt are drying up as investors look for higher yields.

Data from the Treasury Department showed that foreign buyers, including central banks, financial institutions and private investors, were net sellers to the tune of $1.7 billion in September. The first time foreign investors were net sellers in more than two years.

And, as foreign demand is dropping, supply is increasing. The Federal Reserve, as part of its program to slim down its balance sheet following a period of hectic buying during the pandemic, is selling around $60 billion a month.

The Treasury has issued around $2 trillion in new debt so far this year.

Treasury ETFs Ride Wave

EFTs that track U.S. debt, however, have been rising in recent weeks, reflecting the rising yields on Treasuries as prices fall. The iShares iBonds Dec 2028 Term Treasury ETF (NASDAQ:IBTI) is up 2% since hitting a cycle low on Oct. 19, while the iShares iBonds Dec 2032 Term Treasury ETF (NASDAQ:IBTM) is up 4% in the same period.

Falling foreign demand for Treasuries has been most notable amid the biggest buyers of them – China and Japan. Japanese ownership of Treasuries fell by 6% over the year to August, according to data on the Treasury website, while Chinese ownership has fallen 14% since August.

The central banks of both countries often sell Treasuries to buy domestic bonds to stabilize their currencies versus dollar.

But yields remain historically high, with the 10-year yield — which recently hit 5% — still at 4.4%. This provides attractive, low-risk returns for investors.

“The buyer of Treasuries at this point is domestic asset managers, as overseas investors have better alternatives at home. In the future, the most likely source of Treasury demand will be the Fed,” said Mark Cabana rates strategist at Bank of America.

Helping offset this decline in buying from Japan and China has been an increase in Petrodollar spending on Treasuries from the Middle East and Latin America.

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Friday, November 17, 2023