Who Owns US Treasury Bonds? (Breakdown)
Foreign investors, the Federal Reserve, and various entities like pensions, mutual funds, and financial institutions are major holders of US Treasury bonds.
Individual households, the US government, and businesses also invest in these bonds due to the reliable income they provide and backing of the US government.
Government-sponsored enterprises and passive funds, like ETFs, further contribute to the diverse ownership of these securities.
Key Takeaways – Who Owns US Treasury Bonds?
- Diverse Ownership: US Treasury bonds are held by a wide range of entities, from foreign governments and the Federal Reserve to households and businesses. This diversification reflects the backing or the US government and global reserve status of the dollar.
- Foreign Influence: Major foreign holders like China, Japan, and the UK, among others, invest in these bonds due to their safety, stabilization of their own currencies, and as part of their foreign exchange reserves.
- Domestic Stability: Domestically, entities like pensions, mutual funds, and government-sponsored enterprises, as well as the Federal Reserve, invest in these securities. Their investments help with long-term financial strategies, monetary policy, and maintaining economic stability.
Foreign investors hold a significant portion of US Treasury bonds.
They are generally the largest holders.
Leading foreign holders include China, Japan, and the United Kingdom, though many countries around the world hold these bonds.
The Federal Reserve is a major holder of US Treasury bonds.
The Fed purchases these bonds as part of its monetary policy operations, especially during open market operations.
By buying and selling these securities, the Fed influences the federal funds rate and, by extension, short-term interest rates throughout the economy.
The Fed may also buy longer-term bonds via their quantitative easing programs.
Pension funds, both public and private, invest in US Treasury bonds to ensure they can meet their future obligations to retirees.
The stability and relatively low risk associated with these securities make them an attractive choice for these long-term investment strategies.
Active Mutual Funds
Active mutual funds, managed by professional investment managers, often include US Treasury bonds in their portfolios.
These funds purchase Treasuries based on analyses of interest rates, economic conditions, and other factors, aiming to achieve better returns than the market average.
Individual American households also own a portion of US Treasury bonds.
Many people invest in them directly as a means of saving.
Additionally, they can be purchased through savings bonds or TreasuryDirect.
Savings account rates are largely determined by short-term government bond rates. (The bank invests in the bonds and then passes off some portion of the interest to the customer.)
They can also be purchased through brokerages.
Various government agencies hold US Treasury bonds.
Typically, these holdings reside in trust funds for programs like Social Security and Medicare.
The bonds represent IOUs from one part of the government to another.
Financial Institutions & Commercial Banks
Financial institutions, including commercial banks, hold US Treasury bonds as a part of their investment portfolios.
For banks, these securities provide a safe and liquid asset that can be easily converted into cash or used as collateral.
Passive Funds (ETFs)
Exchange-traded funds (ETFs) that track bond indices often hold US Treasury bonds as part of their portfolios.
Because these passive funds aim to replicate the performance of a specific index, they automatically buy and sell Treasuries based on their weight in that index.
Government-Sponsored Enterprises (GSE)
Entities like Fannie Mae and Freddie Mac, known as government-sponsored enterprises, hold US Treasury bonds.
Fannie Mae and Freddie Mac exist to promote stability and affordability in the US housing market by ensuring a reliable source of mortgage funding.
They accomplish their goals by purchasing mortgages from lenders.
This provides the lenders with more capital to issue new loans.
Then they package these mortgages into mortgage-backed securities that are sold to investors, thus transferring the mortgage risk from the banks to the investors.
Corporations and businesses often hold US Treasury bonds via Treasury functions as part of their cash management strategies.
Treasuries offer businesses a safe place to park excess cash with the added benefit of earning some return.
How US Treasury Ownership Can Change Going Forward
The ownership dynamics of US Treasury bonds can shift due to various economic, financial, and geopolitical factors.
Here’s a closer look at some scenarios that can influence both domestic and foreign demand for US Treasuries:
Inflation and Poor Real Returns for Domestic Buyers
Rising inflation can erode the real returns of fixed-rate assets like Treasury bonds.
If the nominal return (i.e., the interest rate) on the bond does not keep pace with inflation, then the real return (nominal return minus inflation) becomes less attractive.
Domestic buyers, especially long-term investors like pension funds and retirees, care deeply about preserving purchasing power.
If real returns on Treasuries turn negative due to inflation, these domestic buyers might reduce their holdings in search of assets that offer better protection against inflation.
Poor Finances and Foreign Buyers
As the US faces deteriorating fiscal health (expenses above revenue and liabilities in excess of assets), it will raise concerns about its ability to service its debt in the long run.
Foreign investors not only look at the returns from the bond itself but also factor in potential currency fluctuations.
A perceived fiscal imbalance, coupled with potential dollar depreciation, can make US Treasuries less appealing to foreign buyers, reducing foreign demand.
Geopolitical Conflicts and Sanctions Risk
In times of geopolitical tensions, the risk of sanctions or asset freezes increases.
Non-allied foreign powers may reassess the wisdom of holding large amounts of US assets if they believe these could be frozen or otherwise affected by sanctions.
Countries might diversify away from US Treasuries and lean more toward alternative safe assets or even commodities like gold.
This trend could be especially pronounced if these countries start using other currencies for invoicing international trade.
(Though note that reserve status is most heavily influenced by foreign FX reserve holdings, not balances used for trade invoicing purposes.)
Central Bank Dilemma with Excessive Debt
When the supply of Treasuries exceeds organic demand, it puts upward pressure on interest rates.
High debt levels can make the cost of servicing that debt more burdensome if interest rates rise.
The Fed faces a tough decision.
Let Interest Rates Rise
Higher interest rates can dampen economic activity by increasing borrowing costs for households and businesses.
This can slow down investments and consumption, potentially leading to a recession.
Purchase the Excess Supply
If the central bank steps in to buy the excess Treasuries, it can keep interest rates in check.
However, this can increase the money supply and potentially lead to structurally higher inflation rates if the economy is near its productive capacity.
Types of Treasury Securities
- Treasury Bills (T-Bills)
- Treasury Notes (T-Notes)
- Treasury Bonds (T-Bonds)
- Treasury Inflation-Protected Securities (TIPS)
- Series I Savings Bonds
- Series EE Savings Bonds
- Floating Rate Notes (FRNs)
FAQs – US Treasury Bond Ownership
What percentage of US Treasury bonds are owned by foreign investors?
Foreign investors hold a substantial portion of US Treasury bonds, with the exact percentage varying over time based on economic and geopolitical factors.
Foreign investors own approximately one-third of all marketable US Treasury securities.
This figure can change based on shifts in global economic conditions, foreign exchange reserves requirements, and the investment strategies of individual countries.
Why does the Federal Reserve purchase US Treasury bonds?
The Federal Reserve purchases US Treasury bonds as a part of its monetary policy operations.
These operations are aimed at managing inflation, controlling short-term interest rates (and sometimes long-term rates), and ensuring the overall health of the US economy.
By buying or selling Treasury bonds in the open market, the Fed can influence the supply of money in the system and thus the federal funds rate, which subsequently impacts interest rates across various financial instruments.
How do US Treasury bonds fit into pension fund portfolios?
Pension funds, both public and private, include US Treasury bonds in their portfolios as a risk-mitigation strategy.
Given that pensions have long-term obligations to their beneficiaries, they require stable and predictable returns.
US Treasury bonds provide such stability due to their low default risk and the backing of the US government.
Moreover, they can help diversify and counterbalance the volatility of other higher-risk assets in a pension portfolio.
What’s the difference between active mutual funds and passive funds in terms of Treasury bond ownership?
Active mutual funds involve hands-on management by financial professionals who make decisions about buying and selling assets, including US Treasury bonds, based on various market and economic analyses.
Their goal is often to outperform the market or a specific benchmark.
Passive funds, such as ETFs, track specific market indices.
When it comes to Treasury bond ownership, passive funds will hold them in proportions reflecting their weight in the tracked index.
Active funds will adjust their holdings based on the fund manager’s strategies and predictions about market movements.
How can individual households purchase US Treasury bonds?
Individual households can purchase US Treasury bonds in several ways.
The most direct method is through TreasuryDirect, a website operated by the US Department of the Treasury.
Through TreasuryDirect, individuals can buy and hold various Treasury securities.
Alternatively, households can also purchase Treasury bonds through banks, brokers, and other financial institutions.
Additionally, US Savings Bonds are a popular way for individuals to invest in a form of Treasury security.
Why do government agencies hold their own issued bonds?
It might seem counterintuitive, but when government agencies hold their own issued bonds, it’s typically within trust funds designated for specific programs.
For instance, the Social Security Trust Fund and the Medicare Trust Fund hold US Treasury bonds.
These bonds essentially represent IOUs from the US Treasury to the trust funds.
When a government agency collects more revenue than it spends (for instance, when Social Security payroll taxes exceed current benefits paid out), the surplus is used to purchase Treasury bonds.
This allows the surplus funds to earn interest and be available for future needs.
How significant is the ownership of Treasuries by financial institutions and commercial banks?
Financial institutions, including commercial banks, are substantial holders of US Treasury bonds.
For these institutions, Treasuries serve multiple purposes.
They act as a highly liquid asset that can be quickly converted into cash, are considered low risk, and can also be used as collateral in various financial transactions.
Given their stability and reliability, Treasury bonds form a core component of the asset portfolios of many banks and financial institutions.
Why do government-sponsored enterprises (GSEs) invest in US Treasury bonds?
Government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, invest in US Treasury bonds for liquidity and capital management reasons.
Investing in Treasuries allows these entities to maintain liquidity, earn a return on their funds, and meet any short-term obligations or capital requirements.
How do businesses benefit from holding US Treasury bonds?
Businesses, similar to other entities, value the safety and stability of US Treasury bonds.
Holding these bonds allows businesses to safeguard their excess cash while earning a return.
Treasuries are also liquid, meaning businesses can quickly convert them to cash if needed.
Furthermore, in uncertain economic times, Treasury bonds provide a refuge for corporate funds, ensuring capital preservation.
Are US Treasury bonds considered a safe investment, and why?
Yes, US Treasury bonds are widely regarded as one of the safest investments.
The primary reason for this perception is the backing of the full faith and credit of the US government.
Essentially, this means that the US government promises to honor the debt obligations represented by the Treasury bonds.