The market for U.S. Treasuries plays a critical role in how the federal government finances its spending through debt and holds the title of the world’s largest. It also has the most liquid government bond market, though the sector has been in focus recently amid market volatility due to uncertainty over tariffs.
U.S. Treasuries are typically viewed as a safe haven for investors during tumultuous times in the economy and financial markets due to their backing by the federal government, serving as a “risk-free” asset with a very low chance of default and being used as a benchmark for other fixed-income securities. Due to the longstanding status of Treasuries as a safe haven, foreign governments hold about 24% of the total U.S. government debt.
The recent turmoil in financial markets brought on by President Donald Trump’s tariffs initially caused investors to flock to Treasuries and pushed 10-year yields to below 4%, though a sell-off ensued as the uncertainty exacerbated investors’ concerns and yields rose to around 4.5%. Yields on 10-year Treasuries fluctuated between roughly 3.7% and 4.7% in 2024.
That recent volatility also raised concerns that foreign governments and investors were selling Treasuries due to concerns about their relative safety amid persistent and growing federal budget deficits as well as uncertainty caused by tariffs and trade policy.
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A recent analysis by Allianz economists noted that, ordinarily, when yields on Treasuries rise, the U.S. dollar gets stronger as foreign capital pursues those higher yields. However, the dollar weakened as yields rose, in this instance, which “suggests major holders were not only selling Treasuries but also converting the proceeds into currencies – possibly reallocating to European markets.”
Here’s what Treasury Department data from the end of February – before the recent sell-off in Treasuries – showed as the 10 largest foreign holders of U.S. Treasuries:
- Japan: $1.125 trillion
- China: $784 billion
- United Kingdom: $750 billion
- Cayman Islands: $418 billion
- Luxembourg: $413 billion
- Canada: $406 billion
- Belgium $395 billion
- France: $354 billion
- Ireland: $339 billion
- Taiwan: $295 billion
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Other countries with significant holdings of U.S. Treasuries as of the end of February include:
- Switzerland: $291 billion
- Hong Kong: $274 billion
- Singapore: $260 billion
- India: $228 billion
- Norway: $162 billion
- Saudi Arabia: $126 billion
- South Korea: $125 billion
- United Arab Emirates: $120 billion
- Germany: $104 billion
All other countries hold a combined $1.642 trillion in U.S. Treasuries, while the grand total, including the major holders of Treasuries, is $8.817 trillion as of the end of February, the Treasury Department reported.
Foreign holders selling off their U.S. Treasuries on a large scale could create challenges for the federal government’s budget as interest rates could rise in response.
That’s due to the inverse correlation between bond prices and yields: Bond prices fall when yields rise as investors seek higher returns on their investment; and bond prices rise as yields fall, with investors paying a higher-price premium on what’s viewed as a relatively safer asset due to the lower yield.
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Last fiscal year, the federal government spent about $881 billion on interest expenses stemming from the need to service the national debt, which exceeds $36 trillion. It marked the first time that federal spending on interest expenses was larger than two major line items on the government’s ledger – the Department of Defense’s budget and Medicare – and contributed to the more than $1.8 trillion annual budget deficit.
Those interest expenses are about two and a half times the amount spent in 2021 due to a larger national debt, which grew at a faster pace in the last several years due to spending on COVID relief measures as well as higher interest rates on the debt.
This fiscal year, interest expenses are projected to rise further to $952 billion, or a record 3.2% of gross domestic product (GDP), according to an analysis by the nonpartisan Congressional Budget Office (CBO). That trend is projected to continue, with interest costs reaching an estimated 5.4% of GDP by 2055; a decade later, the CBO projects the average interest rate on the national debt will exceed the economic growth rate.
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