US TIC Data Shows Foreign Official Treasury Holders are Cutting Exposure, Potentially Pushing up Yields

Though total foreign holdings of US Treasuries have risen throughout the past several months, the latest Treasury International Capital (TIC) data shows foreign official institutions have been cutting their exposure to US debt YoY for the better part of two years. This could be contributing to the ongoing spike in yields on long-dated Treasuries. Declining balances of US Treasury securities among buyers in the foreign official category has compounded the Fed’s quantitative tightening regime, which continues to roll Treasuries off of its balance sheet at a brisk pace.

Following the downgrade of the US’s credit rating by Fitch Ratings in August, the political situation in the US – particularly in regard to its fiscal responsibilities – has only become more unstable. A potential US government shutdown still looms once the current 45-day temporary funding window expires, and the House recently ousted its Speaker for the first time in US history. Congress will not be able to appropriate funds for a 2024 budget until a new Speaker of the House has been chosen. All of this, in addition to ballooning deficits and the debt ceiling drama that played out earlier this year, are likely making the US a riskier borrower in the eyes of foreign institutions.

Related ETF: ProShares Short 7-10 Year Treasury (TBF), iShares 20+ Year Treasury Bond ETF (TLT)

Yields on long-dated US Treasury Bonds have surged over the past several months. The rate on the US 10-year surpassed 4.9% yesterday, putting it within just 10 basis points of a five-handle for the first time since 2007. The yield on the 30-year T-bond has already surpassed the 5.0% threshold. Much of this rise can been tied to increasing expectations that elevated short-term rates will be maintained by the Federal Reserve for a longer period of time than previously projected, as well as an ongoing steepening in the yield curve that could end a prolonged period of inversion. However, selling pressure on US debt from institutions abroad should not be ignored and could indicate that some nations are becoming concerned about the US’s fiscal future.

Though foreign holdings of US Treasuries reached a 20-month high in August, the most recent month of data published, near-constant selling of US Treasuries has taken place among institutions classified as “foreign official” over nearly the same span of time. US Treasury International Capital (TIC) data shows debt held by such institutions, which can include exchanges from foreign public institutions, governments, and central banks, have fallen on an annual basis throughout each of the past 22 months. Foreign official holdings of Treasury notes and bonds (debt securities with maturities of more than one year) declined by…