While much attention is often paid to foreign ownership of U.S. debt, new analysis shows that the Federal Reserve has been the top seller of U.S. Treasury bonds over the past three years.
The central bank has reduced its assets by as much as $1.5 trillion since May 31, 2022, a move that dwarfs the collective actions of all other countries.
The US Treasury portfolio shrinks by $1.5 trillion
This dramatic reduction is the result of the Fed’s quantitative tightening policy, an effort to shrink its balance sheet and combat inflation.
A chart compiled by Otavio Costa from Crescat Capital LLC, based on Federal Reserve data, clearly illustrates this trend.
The Fed’s portfolio is in sharp decline. At the same time, the assets of major foreign creditors – including Japan, China, Germany and Canada – have remained relatively stable or showed only small fluctuations over the same period.
Should the Fed ‘step back as dominant buyer’?
This aggressive selling attitude of the Fed raises critical questions about the long-term stability of the government bond market. Costa noted that “no country or institution has cut its government bond holdings more significantly over the past three years than the Fed.”
Analysts suggest this trend is unsustainable. While the government’s need for financing continues to grow, the absence of the Fed as the primary buyer creates a structural demand gap.
Costa argues that this situation is pushing the US into a corner. “Ultimately, in my view, the Fed – or some other arm of the US government – will have to step back as the dominant buyer of government bonds,” he said.
See also: Shutdown Blocks Jobs Data: Will the Fed Cut Rates in the Dark?
A step towards ‘complete financial repression’?
This policy change has led to speculation about the future of US economic strategy. Costa believes the country is “moving steadily towards a framework of complete financial repression,” with the government taking measures to channel money to itself.
He concluded that while ending quantitative tightening is a necessary step, it “does not in itself structurally change demand for government bonds.”
Price promotion
The S&P 500 index ended Tuesday down 0.16% at 6,644.31, while the Nasdaq 100 index fell 0.69% to 24,579.32. The Dow Jones, on the other hand, gained 0.44% to 46,270.46.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 Index and the Nasdaq 100 Index respectively, fell on Tuesday. The SPY fell 0.12% to $662.23, while the QQQ fell 0.67% to $598.00. Pro for gasoline facts.
On Wednesday, futures for the S&P 500, Dow Jones and Nasdaq 100 indexes traded higher.
Read next:
Disclaimer: This content was produced in part using AI tools and was reviewed and published by Benzinga’s editorial staff.
Photo courtesy: Tanarch at Shutterstock.com
#Forget #China #Federal #Reserve #biggest #seller #debt #trillion #foreign #holdings #remain #stable #SPDR #ARCASPY