Forget China, Federal Reserve Is Biggest Seller Of US Debt—By $1.5 Trillion, Even As Foreign Holdings Remain Stable
The Federal Reserve has sold $1.5 trillion in U.S. Treasuries since May 2022, outpacing foreign holdings, which have remained stable. This reduction is part of the Fed's quantitative tightening policy aimed at combating inflation. Analysts warn that the Fed's absence as a primary buyer could create a demand gap in the Treasury market, potentially leading to a need for the Fed to re-enter as a dominant buyer. Speculation arises about a shift towards full financial repression in U.S. economic strategy.
While much attention is often given to foreign ownership of U.S. debt, new analysis reveals that the Federal Reserve has been the most significant seller of U.S. Treasuries over the last three years.
The central bank has reduced its holdings by a staggering $1.5 trillion since May 31, 2022, a move that dwarfs the combined actions of all other nations.
Fed’s Treasury Portfolio Shrinks By $1.5 Trillion
This dramatic reduction is the result of the Fed’s quantitative tightening (QT) policy, an effort to shrink its balance sheet and combat inflation.
A chart compiled by Otavio Costa of Crescat Capital LLC, using data from the Federal Reserve, starkly illustrates this trend.
The Fed’s portfolio is shown in a steep decline. At the same time, the holdings of major foreign creditors—including Japan, China, Germany, and Canada—have remained comparatively stable or shown only minor fluctuations over the same period.
Fed Needs ‘To Step Back In As The Dominant Buyer’?
This aggressive selling posture by the Fed raises critical questions about the long-term stability of the Treasury market. Costa noted that “no single country or institution has reduced its Treasury holdings more significantly than the Fed in the past three years.”
Analyst suggests this trend is unsustainable. As the government’s need for funding continues to grow, the absence of the Fed as a primary buyer creates a structural demand gap.
Costa argues that this situation is pushing the U.S. into a corner. “Eventually, the Fed—or another arm of the U.S. government—will need to step back in as the dominant buyer of Treasuries, in my view,” he stated.
A Move Toward ‘Full Financial Repression’?
This policy shift has led to speculation about the future of U.S. economic strategy. Costa believes the nation is “steadily moving toward a framework of full financial repression,” where the government would take measures to channel funds to itself.
He concluded that while ending quantitative tightening is a necessary step, it “does not itself overhaul Treasury demand structurally.”
Price Action
The S&P 500 index ended 0.16% lower at 6,644.31 on Tuesday, whereas the Nasdaq 100 index declined 0.69% to 24,579.32. On the other hand, Dow Jones 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 Nasdaq 100 index, respectively, fell on Tuesday. The SPY was down 0.12% at $662.23, while the QQQ declined 0.67% to $598.00, according to Benzinga Pro data.
On Wednesday, the futures of the S&P 500, Dow Jones, and Nasdaq 100 indices were trading higher.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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