The Correlation Between U.S. Debt Held By Foreigners And U.S. Bond Yields

 |  Includes: TBT, TLT
by: Katchum

As U.S. Treasury yields (TBT, TLT) are starting to spike upwards, investors should pay more attention to this new trend. To help investors monitor U.S. Treasury yields, I'll point out another interesting correlation between U.S. debt held by foreigners and U.S. bond yields.

The total public debt consists of two components:

  1. Debt held by the public, which is $11.177 trillion today.
  2. Intragovernmental debt, which is $4.783 trillion today.

The sum of these two is almost $16 trillion. The debt held by the public is increasing very rapidly, while the intragovernmental debt is stable. Of these two components, the first one can be held by foreigners. To see the foreign holdings, visit

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Table 1: Foreign holdings of U.S. treasuries
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You can see that Japan is the biggest buyer of U.S. debt, while China has been holding its Treasuries flat.

Avondale Asset Management has recently updated the percentage debt that foreigners held on in April 2012. They put up chart 1: Percentage of Publicly Traded Federal Debt Held by Foreigners.

What they did is divide the grand total foreign held debt (table 1) by the publicly held debt. If we perform the calculation for June 2012, we get $5.292 trillion divided by $11.177 trillion, which is 47%.

So today, foreigners are holding almost 50% of publicly traded debt. What's interesting to note is that foreigners owned $4.45 trillion of public debt in 2011. That's $1 trillion less than now. But the percentage of foreign owned debt is still 50%. That means foreigners keep buying U.S. debt for the time being.

The Federal Reserve holds $1.25 trillion in long term treasuries today (Chart 2), up from $1 trillion a year ago.

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Chart 2: Federal Reserve Balance Sheet
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So everyone is buying U.S. debt at the same rate, which is 15% per year. As long as this percentage stays the same, and as long as the percentage of foreign-held debt doesn't start to decline, U.S. Treasuries will be safe for now.

It's very interesting to note that the rising trend in chart 1 is inversely correlated with U.S. Treasury yields. Whenever foreign holdings increased (like in the period 1983 till now), the U.S. Treasury yields would decline. Conversely, when foreign holdings decreased (like in the period 1972 to 1983), the U.S. Treasury yields would increase.

Based on this correlation, we should sell U.S. government bonds once foreigners start to decrease their positions in U.S. government bonds as a percentage of publicly held debt. I'll continue monitoring this trend.

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Chart 3: U.S. 10 year government bond yield
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.