By Timothy Videnka, CFA, CFP®
“All we want are the facts, ma’am.”
Every few years, a new narrative takes hold that sounds dramatic enough to stick:
“The world is abandoning the U.S. dollar!”
“Foreign buyers are dumping Treasurys!!”
“The system is breaking!!!”
It makes for great headlines and, given budget deficits as far as the eye can see, it makes logical sense. However, it also tends to miss what is actually happening.
A closer look – particularly at the chart below, from Ned Davis Research – suggests something far less dramatic and far more interesting.
Window Dressing: If China Is “Selling,” Who’s Buying?
On the surface, the data looks straightforward. China’s reported Treasury holdings have declined significantly and foreign official ownership as a percentage of the market has fallen. Case closed, right? Not quite. The chart shows that while China’s reported holdings are down, Belgium and Luxembourg have quietly become two of the largest holders of U.S. Treasurys in the world – now second only to Japan. And unless Brussels and Luxembourg suddenly developed a deep, burning passion for acquiring U.S. government debt, something else is going on.
Spoiler: It’s Not Really Belgium and Luxembourg
Belgium and Luxembourg are home to Euroclear and Clearstream, two of the largest custodial clearing systems in the world. In plain English, they’re where global investors can park assets when they don’t necessarily want their name on the front door. Which leads to a more plausible interpretation: the demand for Treasurys hasn’t disappeared – it’s just gotten a little more camera shy. As the report suggests, countries like China may be routing Treasury ownership through European custodial accounts, rather than holding them directly. Same asset, same owner, different custodian.
What if Buying Slowed in Earnest or Stopped?
What if foreign buying really did stop? It’s a fair question – and one that tends to sound scarier than it is. In actuality, the U.S. Treasury market is not dependent on any single buyer and, in a true stress scenario, the Federal Reserve would step in as a buyer of last resort, just as it has in prior periods of dysfunction. More importantly, the idea of a U.S. default is often misunderstood. The probability of the United States defaulting on debt issued in its own currency is effectively zero – not because of politics but because of mechanics. A sovereign nation that borrows in a currency it controls can always meet its obligations; it may not like the consequences (inflation being the usual tradeoff) but it does not actually run out of money. The same principle applies broadly to any country issuing debt in its own currency. So, while flows and ownership can shift – and make for good headlines – the foundation of the system is far more durable than the narrative suggests.
The Bottom Line
The idea that “the world is dumping Treasurys” makes for a neat, scintillating story but it doesn’t accurately reflect what the data shows. As illustrated in the chart, ownership isn’t disappearing – it’s being rerouted and quietly relocated. Countries that export goods to the U.S. still accumulate dollars and those dollars need a home. U.S. Treasurys remain the deepest, most liquid, and most practical destination for that capital.
If you are interested in hearing more about this or any other macro topic, we can be reached at info@forzawealth.com or by calling 941-203-3748.