The Market Update with EP Wealth Advisors Managing Director, Investments -
Adam Phillips, CFA^®, CAIA, CFP^®

Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.

Market Update: Are Foreign Investors Pulling Back From U.S. Treasuries? 

There has been no shortage of market-moving headlines recently—from a partial government shutdown and a busy earnings season to the announcement of a new nominee to eventually replace Federal Reserve Chair Jerome Powell. But this week, one question has surfaced repeatedly from investors: are foreign investors beginning to sell off U.S. Treasury bonds? 

This concern resurfaced following discussions at the World Economic Forum in Davos and reports that two European pension funds—one in Sweden and one in Denmark—plan to exit their U.S. Treasury holdings. While those moves sound significant, the broader data tell a very different story. 

As of the most recent available figures (November), foreign investors collectively hold approximately $9.3 trillion in U.S. Treasuries, an all-time high. In other words, foreign ownership of U.S. government debt has been growing, not shrinking. When viewed in that context, the roughly $110 billion held by the two pension funds represents only a small fraction of the overall Treasury market. 

Looking country by country, most of the largest foreign holders of U.S. Treasuries have been increasing their exposure. China is the notable exception, having gradually reduced its holdings over time—something markets have been aware of for years. Interestingly, Belgium has emerged as one of the largest holders, which many believe reflects Treasury purchases routed through Belgian custodians rather than a fundamental shift in demand. 

If foreign investors were broadly selling U.S. Treasuries, we would expect to see that pressure show up in bond yields. Yet the 10-year Treasury yield has remained relatively range-bound, hovering around the low-to-mid 4% range. That stability suggests there has been no widespread flight from Treasuries. 

Where the issue becomes more relevant is not the selling of existing Treasuries, but future demand. The U.S. continues to run sizable deficits, which means new debt issuance will remain elevated. The key question is whether there will continue to be enough buyers to absorb that supply without pushing yields meaningfully higher. One way to monitor this is through Treasury auctions, where indicators such as bid-to-cover ratios help gauge demand. So far, auctions have shown sufficient interest, but this is an area that bears watching. 

From an investment perspective, this uncertainty is already reflected in portfolio positioning. While U.S. Treasuries still play an important role—particularly as a defensive asset during economic slowdowns—portfolios currently maintain a relative underweight to Treasuries, with a preference for high-quality corporate bonds. There is also a modest bias toward shorter-term bonds, as longer-duration bonds tend to be more sensitive if yields rise. 

In short, despite recent headlines, there is no evidence of a mass exodus from U.S. Treasuries. That said, the balance between future supply and demand remains an important factor to monitor. As always, investors with questions about how these dynamics affect their portfolio should speak with their advisor. 

Have More Questions About the Market and Investments? Talk to an EP Wealth Advisor!

EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors. 

Disclosures:

•  The need for a financial advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs 

• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.  

• The content of this report is believed to be accurate as of the date of publication and cannot and does not accurately forecast future economic, market, or financial conditions; including changes to retirement benefits, social security, and/or Medicare. For this reason, any subsequent changes, and/or that occur after the publication of this presentation may cause the analysis encompassed herein to become inaccurate. Any references to future market or economic forecasts are based on hypothetical assumptions that may never come to pass.

• EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data referenced. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are of the presenter and are subject to change without notice.
  
  
• EP Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EP Wealth Advisors Inc. has attained a certain level of skill or ability.

• Video transcripts are provided for information purposes only. Accuracy is not guaranteed. The technology used to generate transcripts may result in omissions, misinterpretations, or other errors. EP Wealth Advisors, LLC is not responsible for discrepancies between the transcript and the original video content.

Video Summary: 

Adam Phillips:

Well, there's plenty going on this week, including a partial government shutdown. Earning season, it's a big week for earnings. About one quarter of the, the companies in the s and p 500 are reporting. This week we saw, uh, about, uh, 20% or so report last week. And then obviously we got the nomination for, uh, fed Chair last week who will ultimately replace Jerome Powell when his term expires in May of this year.

All of that's important. We could certainly cover an episode on, on any one of those topics, but this week I wanna talk about something different. You know, last week I received a couple of questions about one topic in particular. I figure if, if I'm seeing if, if I'm getting these questions, then others must have it on their mind too.

And that topic is. Foreign holdings of US treasuries, and specifically whether foreigners are starting to dump their treasury holdings. This is something that comes up every so often. Uh, so this is not the first time, but the reason that, that it, uh, it was in the news most recently is because many started to, uh, right around the time of the, of the world, uh, economic form in Davos a couple of weeks ago.

Many were starting to float this idea of the nuclear option of whether many of the largest foreign holders of US treasuries would look to dump their treasury holdings in response to the, the threats towards Greenland and, and the possibility that the US might look to take over green Greenland by force.

And right around that same time we got news of, uh, of two pension funds, actually one in Sweden, uh, and, and then a Danish pension fund, and they announced their plans to fully exit. Uh, their treasury holdings. And so collectively, those two pension funds own about 110 billion in US treasuries. That is not an insignificant amount, certainly on and in absolute terms, that's a lot of money.

But in terms of the, the total supply of US treasuries, that's, uh, really just a drop in the bucket. So what I wanna look at is just the broader data and what we see here is that, at least with the most recent figures that we have, this is as of November of last year, we see that. About $9.3 trillion of US treasuries are held by foreign investors.

This number has actually been growing in recent years. It's actually at an all time high, so I think that's very, very important. It runs counter to this idea that we're actually seeing this mass selling. If we look at this on a, uh, country by country level, if we just focus in on the five largest, uh, treasury holders by country, we see that most are actually growing their, their treasury holdings.

The one exception, uh, exception is China, which is not too surprising, and this is something that, that we've known about for quite some time. So we do see their treasury holding slipping. Now at the same time, what we see is the number four holder just ahead of Canada. Is actually Belgium, which some I think is very surprising and, and I certainly do as well.

The, the idea there or the thought. That, that many are speculating about is that this is likely, uh, a, a large part of the, the, the Belgian holdings is, is likely through China, and actually they're still buying, but they're doing so through Belgian custodians through Euroclear. The reason they would do this is that they would look to, uh, potentially avoid the threat of, of sanctions and, and these assets being frozen.

So they're looking to diversify their holdings in other ways and, and kind of hide and mask their, their own, uh, their, their ownership. So we see here that there's no signs of selling of US treasuries. We would also see this, uh, if, if there was a, a mass flight out of treasuries, we would see this in in yields in US treasury yields.

And if we just focus on the tenure treasury yield, we see that it's been fairly range bound around 4.2, 4.3% of late. So we're not seeing any evidence there. I think as we focus on the threat. Of, uh,  of, of these foreign creditors and, and buyers of US treasuries going away. That vulnerability, which I think is real, I think the focus shouldn't be on, on the, the selling of, of current treasuries, but maybe the lack of demand going forward.

We know that the US, uh, deficits are not going away. This means that we're going to have to continue to issue debt here in the years to come. We need to make sure that as that new supply comes on market, there are buyers there to take in the supply to absorb this, to make sure that we contain yields.

That's what I'm focused on. And so we have ways of tracking this. Uh, but I think it is a very real risk. We are watching yields certainly, but we also know that the US Treasury is constantly issuing new debt, and these are in the form of these auctions. And so what we do is we keep an eye on auctions to gauge demand.

We look at things like bid to cover ratios, and this tells us that so far there, there have been enough buyers to absorb this demand, but that is something that we, that does bear watching going forward. As investors we're often asked, well, what are you doing about this, this potential risk? We know it's a risk.

We, we think the odds of of flat out selling, um, are, are relatively low, but we do acknowledge that it is a risk. And so what are we doing from an investment standpoint within portfolios, we have a, uh, a, an underweight to US treasuries. We have a relative overweight to high quality corporate bonds instead.

And so that's our way of saying treasuries are still important. They're still something that you do want to own in case the economy stumbles. And we do see a flight towards high quality assets. But at the same time, we wanna acknowledge this risk of higher bond yields if we do see less demand and more supply.

And so we do have an underweight there. We also have what we call a. Uh, slightly, uh, uh, underweight duration bias. And what that means is that we have a bias or we favor shorter term, uh, treasuries and bonds in general. And because we think that in that environment it would be those longer term bonds that would really feel, uh, the biggest hit.

And so that's our way of managing this uncertainty. I know this is a, a, uh, a wonkier topic than usual. Um, but I thought it was an important one to, uh, to mention and, and just highlight because it does appear to be top of mind. So I will leave it there for now, but if you have any other questions or wish to talk about this, uh, with your advisor, please don't hesitate to reach out to them and I'll look forward to seeing you next time.