Not long ago there was significant fear that if China, Japan or another large non-U.S. holder of U.S. Treasuries were to stop buying those securities, then Treasury yields would climb dramatically.
Specifically, there were concerns about China, which holds more than 10% of Treasuries worldwide: If China stopped buying Treasuries or sold sizable amounts of them, would there be enough buyers to shore up the price?
My response to these concerns is twofold.
1. If large official holders of U.S. Treasury debt, such as Japan or China, were to sell large amounts of Treasuries quickly, they would only be undermining themselves, as prices of the rest of their securities would fall substantially in value. Therefore, there is a low probability that foreign reserve managers of those countries would decide to sell such an amount of Treasuries so as to move prices dramatically.
2. The economic (and therefore monetary) policy environment at the time of any reduction of Treasury purchases (or even their sale) would likely determine the path for Treasury yields, as additional demand could come from other sources under many circumstances. (My colleague Alessio de Longis noted this in his blog in January.
As it turns out, perhaps to the surprise of some, China has not been a net purchaser of U.S. Treasuries for some years. During this hiatus, Treasury yields actually fell as non-U.S. purchases dwindled and yields have since been range-bound (Exhibit 1).
This begs the question: What occurs if China begins to sell Treasuries, perhaps to defend its own currency? If the selling was on a relatively small scale, say $50 billion a month, we would expect very little impact on Treasury yields. One of the primary reasons for this belief is that reserve managers would most likely sell very short term securities that do not add much interest-rate risk back into the market.
Consider that the U.S. Treasury Department increases and decreases the supply of Treasury Bills, or T-bills (i.e., securities issued by the Treasury Department with maturities up to 12 months), by far more than $50 billion when needed, and yet rates move little. There is no reason to expect the market to be significantly affected by sales of similar securities by reserve managers, whether Chinese or elsewhere.
Certainly, if many foreign reserve managers were to sell Treasury securities at the same time—particularly longer-maturity securities—then yields would likely rise. But it is important to remember that if they did, the prices of the remaining securities in their portfolio would go down. Therefore, we would expect them to act in their own best interest and sell short-maturity Treasuries and only in orders of magnitude that would fit their immediate needs.
Evolving Treasury Ownership
Over time, the ownership of U.S. Treasury securities has changed significantly. Some of these changes are structural, while others may be more cyclical. As Treasury ownership has evolved, there has been little disruption to prices that go beyond what one would expect given economic factors. We think any further evolution in Treasury ownership will have little lasting impact on Treasury market pricing.
In 1970: Banks were the dominant owner to Treasuries, with about 24% held by the Federal Reserve (Fed).
In 1990: Pensions plans became the dominant Treasury market participant, owning more than 22%, but local governments and the non-U.S. sector doubled their relative ownership compared with 20 years earlier. The Fed owned less than 10% of the market at that time.
In 2000: Pensions were still large holders of Treasuries, but non-U.S. owners became the largest segment. Fed holdings grew to over 12%.
In 2015: Non-U.S. owners collectively held the largest portion of Treasury debt, at over 40%, a bulk of which is held by official institutions such as foreign reserve managers. The Federal Reserve and pension plans are the next most prominent owners. State and local governments held a smaller share than ever before.
Also, when we talk in terms of non-U.S. owners of U.S. Treasuries—or what we call the “non-U.S. sector”—we refer to all conceivable owners, some of which are pension plans, banks, insurers and other private holders who just happen to be domiciled outside the United States. In fact, “non-U.S. official” ownership currently accounts for about 60% of all non-U.S. Treasury holders. The rest, totaling about $2 Trillion, is in private hands (Exhibit 4).
Conclusion: Ownership of U.S. Treasuries is Ever Changing
The bottom line is that ownership of markets change over time—and the Treasury market is no different. Shifts in demand do not necessarily lead to significant price moves. We believe it’s quite possible that slowdowns in non-U.S. official purchases of U.S. Treasuries is nothing more than a shift toward another buyer base, with little cause for concern.
In the future, perhaps risk-averse shareholders of money market mutual funds could become the largest holders. Rule changes for money-market funds, which go into effect this year, could cause a significant increase in demand for short term Treasury securities—but we’ll have to discuss those another day.
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These views represent the opinions of the portfolio manager at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.