Structural Drop in Treasury Demand: Any Buyers Out There?

As the Fed continues gradually to normalize its interest rate policy, there is increasing discussion about when it will announce plans to reduce the size of its balance sheet by trimming its holdings of Treasury bonds. Here we consider this in the context of long-term trends in the ownership of Treasury securities and the part these have played in the determination of bond yields.

One major trend starting in the previous decade was the significant purchases of Treasuries by foreign official buyers. But foreigners became net sellers of Treasuries in 2016 for the first time in about twenty years. Another major trend has been the open market purchases of Treasury bonds by the Federal Reserve (Fed) since 2008. As the Fed’s holdings decline, two major sources of structural demand for Treasuries will have started to reverse. All else equal, this is likely to reinforce the upturn in bond yields as the Fed continues to hike short-term rates.