The landscape of the US Treasury market has shifted as the share of debt held by mandate-driven buyers, such as the Federal Reserve and foreign central banks, has dropped from over 50% to below 15%. These institutions previously purchased bonds for monetary policy or reserve management rather than for yield.
The Federal Reserve has reduced its balance sheet by approximately $1.5 trillion in Treasuries through its quantitative tightening program. Simultaneously, the proportion of outstanding Treasuries held by foreign governments has fallen from over 40% to below 15%.
Foreign private investors now hold a larger share of US Treasuries than foreign official institutions. Unlike central banks, private investors prioritize risk compensation and react to inflation data, fiscal policy, and global capital flows, which may lead to structurally higher borrowing costs for the US government.
The transition to private investors, who demand a term premium for holding long-duration debt, marks a departure from the era of low-cost borrowing. Market participants are now advised to re-evaluate hedging strategies and correlation assumptions in portfolio construction due to increased volatility.
