Investing
Fixed Income
Ongoing federal government deficits have required the U.S. Treasury to issue substantial amounts of U.S. debt to finance government spending. As of the second quarter, U.S. Treasury debt outstanding totaled $15.4 trillion. Of that, $13.4 trillion, or 87 percent, is marketable debt, or bonds and securities that may be bought by the public. The largest block of marketable debt, or 47 percent, is owned by foreign buyers. Among foreign holders, China and Japan have 38 percent, the largest holdings, at about $1.2 trillion each. Their combined holdings of $2.4 trillion account for about 18 percent of all marketable U.S. Treasurys outstanding. Third on the list of foreign debt holders is Ireland, with just $270 billion, or 2 percent of marketable debt outstanding.
Foreign purchases of U.S. Treasury securities have slowed after a surge in buying during the recession. The slowdown has accelerated sharply over the past two years, culminating in net sales of Treasurys in the second quarter of 2016 (Chart 4). On average over the past year, about 16 of the top 36 holders of Treasury debt have been net monthly sellers. The largest, China, has been a net seller in eight of the past 12 months, while number two, Japan, has been a net seller for six of the past 12 months. Continued weakness in foreign demand for U.S. Treasury securities may become a problem for the Treasury, the Federal Reserve, and the economy.
If domestic purchases can’t take up the slack from weaker foreign demand, then rates on those bonds could rise sharply. The positive development is that just as foreign demand has been fading, demand for U.S. Treasury debt has been picking up among U.S. households. Households have been relatively strong net buyers of Treasury debt over the past year (Chart 4), adding about $300 billion to household balance sheets.
U.S. household balance sheets are in relatively good shape. Household net worth hit a record high $89.1 trillion in the second quarter. Total assets are at a record $103.8 trillion, while liabilities stand at $14.7 trillion. Nonfinancial assets, primarily real estate and consumer durable goods, totaled $31.4 trillion, or about 30 percent of total assets. Financial assets accounted for $72.3 trillion, or about 70 percent. The combination of healthy balance sheets and a relatively strong job market is a primary reason we expect the current economic expansion to continue.
Credit-market instruments—including debt securities such as Treasurys, municipal securities, corporate bonds, mortgage bonds, and student loans—directly held by households (as opposed to assets held indirectly, through life insurance and pensions, for example) account for about 7 percent of total household financial assets. Treasury securities make up about 21 percent of that, an allocation that has risen sharply since hitting a low of about 3 percent in the middle of the recession. Such a dramatic increase might raise doubts about the ability or desire of households to continue buying Treasury securities.
However, from a longer-term perspective, Treasury securities have typically accounted for a significantly higher portion of household balance sheets: From 1970 to 1999, they accounted for 25 to 35 percent of credit instruments. In light of the federal government’s likely need to increase its sales of securities and the fading foreign demand, household demand will be critical in the coming years.
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