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Foreign Holdings of US Treasury Bonds Sink

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Major Foreign Holders of U.S. Treasury Bonds Cut Their Holdings

United States Treasury Bonds are the most liquid security in the world. Central banks hold U.S. Treasuries as reserves. In most cases, United State Treasury Bonds constitute the largest portion of a nation’s foreign reserves.

Over the past few years, many countries have begun to cut their US Treasury holdings and to diversify their reserve assets into other currencies and gold. About ten years ago over 75% of all international transactions were conducted in U.S. dollars. That percentage has dropped to about 65-70%. As countries increasingly conduct trade in currencies other than United States dollars, their need to hold U.S. Treasuries diminishes.

Countries may also need to sell some of their reserve assets including their holdings of U.S. Treasuries in order to protect their own currencies or to fund trade deficits. In some instances, some countries may sell U.S. Treasuries as a political gesture.

According to the latest U.S. Treasury report on foreign holders of treasury securities released last week, over the past year the following countries have reduced their U.S. Treasury holdings:

China

China is the world’s largest foreign owner of U.S. Treasury Securities. China has amassed a $1.27 trillion U.S. Treasury portfolio largely due to its trade with the United States.

U.S. Treasury Holdings as of:
August 2015 $1270.5 billion
August 2016 $1185.1 billion
Difference: 85.4 billion
Percentage decrease 6.7%

China has been reducing its overall foreign reserves the past year. China, however, has increased it gold reserves during the same time period.

Japan

Japan was the largest holder of U.S. Treasuries until China surpassed her a few years ago. An ailing economy has resulted in a reduction of Japan’s U.S. Treasury Security holdings.

U.S. Treasury Holdings as of:
August 2015 $1197.0 billion
August 2016 $ 1144.0 billion
Difference: 53 billion
Percentage decrease 4.4%

Russia

Russia’s trade with the United States over the past decade has been small as the bulk of Russia’s economy is based on selling oil. Since the United States has a large domestic oil supply, and purchases its remaining oil from gulf state countries, its trade with Russia is limited and has been limited further due to sanctions place on Russia the past two years.

Russia held over $140 billion in U.S. Treasury Securities before sections were imposed over two years ago.

U.S. Treasury Holdings as of:
August 2015 $89.9 billion
August 2016 $87.5 billion
Difference: 85.4 billion
Percentage decrease 6.7%

Mexico

Mexico’s increasing budget deficit and trade imbalance has led to the selling nearly half of their U.S. Treasuries over the past year.

U.S. Treasury Holdings as of:
August 2015 $79.9 billion
August 2016 $46.1 billion
Difference: 33.8 billion
Percentage decrease 42%

Saudi Arabia

Saudi Arabia’s financial difficulties due to lower oil prices the past two years has led to a reduction in their U.S. Treasury holdings.

U.S. Treasury Holdings as of:
August 2015 $112.8 billion
August 2016 $93.8 billion
Difference: $19 billion
Percentage decrease 17%

Impact of U.S. Treasury Sales By Foreign Entities

The United States relies on funding its deficit in part from issuing U.S. debt securities to foreigners. Lower demand for U.S. Treasury Securities would mean higher interest rates and the need to raise taxes to pay for domestic spending.

Note: Major foreign holders of treasury security data from U.S. Treasury at treasury.gov. The Treasury notes “Since U.S. securities held in overseas custody accounts may not be attributed to the actual owners, the data may not provide a precise accounting of individual country ownership of Treasury securities.

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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.