"Even with Foreign Demand Recovery, Difficult to Contribute to US Treasury Market Supply-Demand Stability as in the Past"

Kukgeum Center Report on "Current Status and Implications of Foreigners' US Securities Investment"

There is an analysis that the demand for U.S. Treasury bonds from traditional current account surplus countries such as China, Japan, and the Eurozone is decreasing, and as investments from commodity-exporting countries diversify, it will be difficult for U.S. Treasury investments to increase significantly in the future.

On the 3rd, the International Finance Center stated in its report titled 'Status and Implications of Foreign Investment in U.S. Securities' that since 2020, as global current account imbalances have expanded and the patterns by country have changed, it examined the impact on the circulation structure of 'current account surplus countries → purchase of U.S. assets,' and found these results.

According to the report, the overall scale of foreign investment in U.S. securities has increased over the past few years. However, Japan and the Eurozone have seen a slowdown in investment due to decreases in current account surpluses and the burden of currency hedging; China due to diversification of external financial assets; and major oil-producing countries due to preferences for other countries' stocks and real assets.

Specifically, in the Eurozone, including Germany, private-sector-led investment in U.S. securities has continued, but since last year, U.S. securities investment has decreased due to current account deficits and rising intra-regional interest rates. However, among Eurozone countries, Belgium, Luxembourg, Ireland, and the United Kingdom have increased their U.S. securities investments since 2020, which is estimated to be offshore funds considering current account deficits and country size.

Reduced U.S. Treasury Demand from China, Japan, and the Eurozone

Japan and Asian export countries have seen a reduction in current account surpluses and rising currency hedging costs since 2021, weakening their capacity for U.S. securities investment. However, in countries such as Korea and Taiwan, private-sector investment in U.S. stocks has expanded.

China's current account surplus has significantly increased since 2020, but unlike in the past, amid diversification of external financial assets, investment in U.S. securities, centered on government bonds, is decreasing.

Since 2021, oil-producing countries in the Middle East and Norway, which have seen a significant increase in current account surpluses due to rising oil prices, are expanding overseas stock and real asset investments through sovereign wealth funds rather than U.S. dollar bonds.

Considering these country-specific trends, the global flow of savings back into the U.S. appears to remain valid, but the report forecasts that it will be difficult for foreign investment in U.S. securities, especially U.S. Treasury bonds, to increase significantly in the future.

Kwon Dohyun, Head of Capital Outflow and Inflow Analysis at the International Finance Center, said, "With the increase in Treasury supply due to the expansion of the U.S. fiscal deficit, even if foreign demand recovers, it will be difficult to contribute significantly to stabilizing supply and demand in the U.S. Treasury market as in the past," adding, "As the global structure of 'current account surplus → accumulation of foreign exchange reserves' weakens, the share of overseas public sector in the U.S. Treasury market has decreased, while the share of the private sector, which is sensitive to interest rate changes, is gradually increasing."

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