Global Macro Monitor

The 10-year Treasury bond yield traded at 2.03 percent today a level not seen since April 2012. We thought it’s a good time to revisit who are the major holders of U.S. Treasury securities.   Some of the data are subject to caveats – noisy as some categories calculated as residuals and group various holders together — and how they are presented should be viewed as good approximations.  

Click on the charts to enlarge and for better resolution.

First, the total public debt of the U.S. government in Q3 2012 was $16.1 trillion (101.6 % of GDP), of which, $11.3 trillion (71.2% of GDP) was held by the public and $4.8 trillion by the government, such as the social security trust fund.   These data are reflected in the table below.

As of yesterday, current total U.S. public debt outstanding is $16.4 trillion, with $11.6 trillion held by the public and $4.9 trillion in intergovernmental holdings.

Chart 1 illustrates the profile of the debt.  For example, 63 percent of Treasury securities are in the form of notes that mature in one to ten years.

Chart 2 shows the major holders of U.S. Treasury securities at the end of Q3 2012.  Note that almost 50 percent is held by rest of the world and 14.6 percent held by the Fed.

Chart 3 divides the holders into official and private.  More than 46 percent of the holders are foreign official, mainly central banks, and the Federal Reserve.   That is, almost half of Treasury holders are not driven primarily by market incentives.  Much of the accumulation by foreign central banks has been the result foreign exchange intervention to keep their currencies from appreciating.

Today’s Wall Street Journal has an article about the potential capital losses the Fed will incur if interest rates rise.    It is important that investors internalize that half of Treasury holders are policy driven and not driven by profits/losses during major market moves.   Furthermore, as a global currency war looms it unlikely that foreign central banks will be dumping Treasuries en masse though they may continue to diversify their foreign exchange holdings into other currencies.

Chart 4 illustrates that almost half of the$5.6 trillion foreign holdings are from China and Japan.  Also note that more than 70 percent of Treasuries held by the rest of world are official holdings, i.e., central banks.

Finally, there is much talk today about how the bond market may be on the verge of a collapse similar to 1994.  We recall that during run up to the 1994 collapse everyone and their mother had leveraged yield curve plays on.

Not so today and the Fed’s monetary policy has made the bond market vigilante of the 1990’s extinct.  Not that they can’t be resurrected, but it is unlikely until the Fed steps out of the way.  It is our opinion,  the great “great rotation” will therefore result in a more orderly increase in rates.   Credit spreads may be a bit more volatile, however.

The table illustrates the profile of holders is much different than it was in 1994.   Households, which include hedge funds, now hold only 8 percent of the outstanding Treasuries versus around 20 percent in 1993.   Banks have gone from 9.2 percent to 2 percent.

The table also shows that 78 percent the almost $8 trillion increase in U.S. marketable Treasury debt from 1993 to Q3 2012 was taken down by the rest of the world and the Fed.  Stunning!

The “exorbitant privilege”  * of being the international reserve currency has driven a  massive amount of liquidity into the U.S. markets, which has:  1)  enabled the federal government to run large budget deficits;  2) supported the value of the dollar;  3) reduced inflation and increased real incomes;  4)  distorted U.S. interest rates;  and 5)  helped fuel the  stock market and housing bubble.

No end in sight until the world moves off or the current international monetary regime collapses.

 * For a great overview,  see Barry Eichengreen’s,  Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.

(click here if charts and table are not observable)