With U.S. Treasury issuance skyrocketing over the past couple years, yields at new all-time lows and talk of a bond bubble rife, we are often asked, “Who is buying all this Treasury debt?” Below are a series of charts that attempt to answer this question.
When asked who is buying Treasury debt, people usually instinctively think of foreigners.
At face value, the next two charts look impressive. The first shows all foreign buyers of Treasury notes and bonds on both on a monthly (top panel) and a rolling 12-month sum basis (bottom panel). This data comes from the Treasury International Capital(TIC) Report.
As the bottom panel shows, foreign net purchases of Treasuries totaled just over $500 billion in the past year.
When viewed in the light of surging issuance, foreign purchases are actually falling as a percentage of bonds auctioned.
The next chart compares foreign net purchases of Treasuries to the amount of bonds issued every quarter in blue. The red line compares Chinese net purchases of Treasuries to the amount of bonds issued every quarter.
From 2004 to 2008 all foreigners regularly bought more Treasury securities than were issued. This is shown as a ratio above 100%. To be clear, the ratio below shows all Treasury securities bought by foreigners (whether at auction or in the secondary market) relative to all securities issued by the Treasury department for the quarter.
Since mid-2008 foreign purchases of Treasury securities have been under 50% of securities auctioned, and the Chinese have bought less than 10% of the amount auctioned. Even though foreigners have almost doubled their buying of Treasuries in the last few years, they have not kept pace with growing Treasury issuance over the same period. As a result, foreign purchases now account for less than half of what has been issued since mid-2008. Domestic purchasers of Treasuries are now buying more than half of the amount auctioned.
Who are these domestic purchasers of Treasuries?
Domestic Investors – The Federal Reserve
When thinking about potential domestic purchasers of Treasury securities, the Federal Reserve quickly comes to mind. The two charts below show the Federal Reserve’s holdings of Treasuries and their quarterly net purchases. This data comes from the flow-of-funds report.
When the Federal Reserve first created the Term Auction Facility, or TAF, in late 2007, they initially “sterilized” any loans by selling Treasuries in an amount equal to those loans. This is evident in the large quarterly net sales in early 2008 in the second chart below. Since foreigners were buying more Treasuries than were being issued during this period (greater than 100% in the chart above), these sales were not a problem.
The Federal Reserve’s holdings of government securities quickly rose in light of QE1 and QE2. Even though foreign demand for Treasuries was still present during this time, the Federal Reserve’s purchases far outpaced foreign purchases.
Domestic Investors – Mutual Funds
The next big domestic buyer that comes to mind is the mutual fund community with more than $12.1 trillion in assets ($9.5 trillion in long-term funds — stocks, bonds and hybrid funds — and $2.6 trillion in money market mutual funds). The two charts below show the net purchases of Treasuries for money market mutual funds and long-term mutual funds. This data also comes from the Federal Reserve’s flow-of-funds report.
As the first chart shows, money market mutual funds were net sellers of Treasuries seven quarters in a row before returning with net purchases in Q4 2010 and Q1 2011.
The second chart shows long-term mutual funds are net buyers of Treasuries, but in small quantities. In Q1 2011 their net purchases only totaled $3.07 billion. Clearly neither the long-term mutual funds nor the money market funds are large players in the Treasury market when compared to foreigner or the Federal Reserve.
Domestic Investors – Banks
Are banks’ holdings of Treasuries closer in scale to those of the Federal Reserve or foreigners?
The first chart below shows U.S. chartered bank holdings of Treasuries have declined from $294 billion in Q1 1994 to just $37 billion in Q1 2011. The second chart shows a long-term look at the percentage of banks’ assets invested in Treasuries. Back in the 1950s it was near 40%. Today it is less than 0.5%. Simply put, banks do not buy Treasuries.
Domestic Investors – Households
The two charts below are also from the Federal Reserve’s flow-of-funds report. Households’ holdings of Treasuries have grown more than threefold since December 2008 despite net sales of $155 billion in Q1 2011. But who are households?
From the name, one could conclude that households are “mom and pop.” But this category is more than this. As we explained last year:
To answer this question we must first lay out the definition of households from the flow of funds report (page 12):
For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector. For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government, and the balance is assigned to the household sector.
To be clear, the “household sector” is misnamed. It is the residual account with a fancy name. So given this, what does it mean when the residual account soars? We would suggest that it means there is a measurement problem. In this case, the Federal Reserve cannot “find” the buyers of Treasuries thanks to the exploding deficit. They correctly assume that the buyer exists (otherwise the market would not exist) and therefore place the “missing” buying in the residual account. Since this account is called the “household sector”, we all assume that “mom and pop” bought this sum.
If “mom and pop” were really the end buyers we would expect to see similarly booming numbers from the mutual fund industry. However, as we detailed above, mutual fund purchases are a somewhat insignificant portion of domestic buying.
Our guess is the domestic buyer is a leveraged carry trader, a mutual fund, a brokerage subsidiary or other group that does not have a category and gets “dumped” into the default category of “households.”
We have shown that the deficit has exploded higher to the point that issuance is outrunning foreign purchases. Clearly a large portion of this issuance has been bought by the Federal Reserve in the form of QE1 and QE2. Households sold a record $155 of Treasuries during Q1 2011, a trend that bears watching.
With QE2 now a relic of the past, the Federal Reserve would have to initiate a new round of QE to continue soaking up Treasury issuance. Perhaps the decline in interest from both foreigners and “households” was one factor in prompting the Federal Reserve to guarantee low rates for a period of two years. For the time being, the drop in rates seems to indicate that leveraged traders are taking full advantage of this opportunity. Only time will tell if this is reflected by increased demand from “households.”
Who Is Buying U.S. Treasuries?
Bianco Research, 23 August, 2011