America Does Not Have a Foreign-Capital Problem. It May Have a Treasury-Demand Problem
America Does Not Have a Foreign-Capital Problem. It May Have a Treasury-Demand Problem
America Does Not Have a Foreign-Capital Problem. It May Have a Treasury-Demand Problem
Foreign money is still flowing into the United States. The more interesting question is what foreigners are buying. Over the past year they have poured money into American shares and corporate bonds while their purchases of U.S. government debt have fallen sharply. This is not evidence of a flight from America. It is evidence of a change in the mix of American assets foreigners are buying, and it comes at an awkward time for a federal government that needs to sell vast amounts of debt.
The change is clear in the Treasury’s own figures. Over the twelve months through July 2026, net foreign purchases of Treasury bills were $49.4bn, down from $250.5bn over the previous twelve-month period, a fall of just over 80 per cent. The change in longer-term debt was less severe but still large: net foreign purchases of Treasury notes and bonds fell from $456bn to $246.6bn, a decline of about 46 per cent.
Taken alone, those figures might suggest that foreign investors are losing interest in American assets. The wider figures show something quite different. Over the same two periods, net foreign purchases of U.S. corporate bonds rose from $341.1bn to $452bn and purchases of agency bonds from $73.4bn to $114bn. Purchases of U.S. equities rose much more sharply, from $598.1bn to $941.9bn. Total net foreign purchases of long-term American securities increased from about $1.47tn to $1.75tn. Foreign capital did not retreat from American markets. Its purchases shifted strongly towards private-sector assets.
The United States therefore does not appear to have a foreign-capital problem. It may increasingly have a Treasury-demand problem.
That distinction matters because Washington needs buyers for an extraordinary amount of government debt. The Congressional Budget Office projected a federal deficit of $1.9tn in fiscal 2026, equal to 5.8 per cent of GDP, with debt held by the public reaching 101 per cent of GDP. Treasury expected to borrow $739bn in privately held net marketable debt during the July-to-September quarter and another $628bn during the final three months of the year.
There is no shortage of possible buyers. American banks, pension funds, insurers, mutual funds, money-market funds, hedge funds and households can all hold government debt. Foreigners have not abandoned the market either. Their Treasury holdings still stood at about $9.25tn in July. The question is therefore not whether the United States can sell its debt, but what price investors will demand to absorb an expanding supply.
Who those investors are matters. Foreign central banks have long held Treasuries as reserve assets and have institutional reasons to own safe and liquid dollar securities. Private investors face a different choice. They can hold a Treasury note, a corporate bond, shares in an American company or assets elsewhere in the world. The return on Treasury debt must therefore compete with the returns available elsewhere.
Research published by Federal Reserve economists Daniel Beltran and Canlin Li in September gives this argument firmer ground. They found that the Treasury market has become more price-sensitive as relatively less price-sensitive foreign official investors have become less important and hedge funds and other private investors more important. Their model estimates that an additional $100bn of Treasury supply now raises the five-year yield by about three basis points.
The mechanism is straightforward. Treasury sells securities and investors decide what they will pay. If the market will not absorb the amount offered at the existing price, the price must fall until enough buyers enter. Since bond prices and yields move in opposite directions, the yield rises. The government gets its money, but it pays more for it.
This does not mean weaker foreign demand explains the recent rise in Treasury yields. Inflation, expectations for Federal Reserve policy, economic growth, oil prices, corporate borrowing and expectations about future deficits all affect yields. There is also an important difference between Treasury bills and longer-term bonds. An 80 per cent fall in net foreign purchases of short-term bills cannot simply be used to explain movements in ten- or thirty-year yields. The 46 per cent decline in purchases of longer-term Treasury securities is more relevant to that part of the market.
The broader shift matters because it does not require a crisis. Much discussion of foreign ownership of U.S. debt has centred on the possibility that China, Japan or another large holder might suddenly dump Treasuries. But existing holders can keep most of their portfolios while buying less of the new debt Washington brings to market. The pressure then appears not as a dramatic buyers’ strike but in the price required to draw other investors in.
This also changes what we mean when we talk about foreign confidence in the United States. Foreign investors can remain eager to own American companies while becoming less eager to finance the American government at prevailing yields. The combination of record equity purchases and much weaker Treasury purchases shows that these are separate decisions. Money can continue flowing strongly into the United States even as the government faces a more demanding market for its debt.
The timing matters because the cost of carrying public debt has already risen sharply. Interest costs for mature-economy governments rose by 1.5 percentage points of GDP between December 2021 and August 2026. In the United States they rose by 1.6 percentage points of GDP between January 2021 and 2026. Higher yields therefore do more than make the next auction expensive. As existing debt matures and is refinanced, they gradually raise the government’s interest bill and consume revenue that could have been used elsewhere.
None of this points to an imminent American funding crisis. The dollar remains the main global reserve currency, Treasuries remain central to the international financial system and foreign investors still own trillions of dollars of U.S. government debt. Those advantages give Washington room that most governments do not have.
But they do not abolish the price of borrowing. The federal government is bringing large amounts of new debt to market just as foreign purchases of that debt have weakened and foreign demand for other American assets has surged. The evidence does not yet establish that this change is permanent, nor does it tell us how much of the rise in yields it has caused. It does show that the marginal buyer of Treasury debt matters more when Washington needs so many of them.
Foreigners still want American assets. The harder question for Washington is what yield will persuade enough of them, and enough other investors to want its debt.
To support my work and help keep these essays free and ad-free, you can support me on Patreon. Subscribers also receive the source notes and reading lists behind my work.