There is a lot of discussion in markets about the implications of the US fiscal situation.
Three areas to watch for investors are 1) debt ceiling and shutdown risk, 2) Treasury auctions, and 3) US downgrade risk. The complication for markets is that the debt ceiling and shutdown come and go with months between, but Treasury auctions happen every week, and a notice from a rating agency about the US fiscal situation can come with no warning.
In other words, for investors, the fiscal situation is not like watching quarterly earnings but instead a topic constantly lingering in the background that can impact markets with little or no warning—if, for example, a Treasury auction tails or rating agencies issue a statement.
The fundamental question remains: Who is going to buy the growing supply of Treasuries, and at what price?
Looking at net foreign purchases of Treasuries shows that foreign official institutions, i.e., central banks and sovereign wealth funds, have been net sellers of Treasuries since 2015, see chart below.
Foreign private buyers, on the other hand, stepped up purchases when the Fed raised interest rates in 2022. But in 2023 with rates peaking, they have been slowing their purchases, see again the chart below.
The bottom line is that investors across all asset classes need to spend some time not only on who is buying Treasuries—including whether it is yield-sensitive or yield-insensitive buyers—but also on Treasury auction metrics and what the rating agencies are saying and doing.
Source: Treasury, Haver Analytics, Apollo Chief Economist
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