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The Future of Foreign Investment in U.S. Treasury Debt: What Happens When the Fed Eases

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Douglas Rissing

Foreign investment in U.S. Treasury debt has remained significant, standing at around 30% as of Q2 2023, showcasing the U.S.’s reputation as a safe-haven for investors worldwide.

Despite decreases in holdings by China and Japan, the overall level has remained steady, as highlighted by insights from Wells Fargo Investment Institute strategist analyst Jennifer Timmerman and global strategist Gary Schlossberg.

However, historical trends suggest that overseas investment in U.S. debt can be more volatile than domestic holdings, especially when external factors like weak fiscal policies and underperforming economies lead investors to seek more appealing global alternatives.

Currently, the Federal Reserve’s measures to tighten credit, coupled with perceived safe-haven demand during the global economic slowdown, have bolstered foreign financing of the U.S. budget deficit.

Nevertheless, it’s unwise for investors to solely rely on this support, especially given the potential impact of the Fed’s future interest rate cuts.

saupload Change in foreign investment in U.S. debt thumb1

Source: U.S. Treasury

β€œWe anticipate a temporary weakening in dollar demand in response to declining U.S. interest rates and an increase in global risk appetite as investors favor other currencies when the world economy rebounds later in 2024, possibly leading to reduced demand for U.S. debt,” stated the analysts.

Pertinent tickers to observe include: Invesco DB US Dollar Index Bearish ETF (NYSEARCA:UDN), ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), and Direxion Daily 20+ Year Treasury Bear 3X ETF (NYSEARCA:TMV).

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