The US owes $7.3 trillion to foreign investors, which countries are the largest holders of that debt?

The growing debt of the US is the result of simple mathematics – every year there is a mismatch between spending and revenue. And as the US government continuously borrows money, one of the world’s most powerful countries owes foreign investors a total of $7.3 trillion of its national debt.

These debts are in the form of government securities, one of the most liquid assets in the world. Central banks use them as their foreign exchange reserves, and private investors seek them as a safe haven due to their low risk of default or buy them as a store of value. Additionally, government bonds are often used as collateral during certain international trade transactions or can be used by countries to assist in managing exchange rate policy. For example, countries may buy government bonds to protect their currency’s exchange rate from speculation.

As Milan Horvat, CEO of FIMA Plus, explained on his LinkedIn profile, ‘if we know that recent major earthquakes and bankruptcies in the US banking sector were caused by excessive amounts held in those very bonds, it is good to know what their distribution is around the world.’

Who are the largest foreign holders of US debt?

Visual Capitalist, using data from the US Department of the Treasury, has identified the largest foreign holders of US national debt.

First on that list is Japan. With a total of $1.1 trillion, Japan is the largest foreign holder of US debt, surpassing China, which has lost more than $250 billion, or 30 percent of its holdings, since 2019. China is now in second place with $867 billion. Notably, China has been reducing its exposure to the dollar since 2018, and the offloading of bonds is one way the country can manage the yuan’s exchange rate. The United Kingdom is the third largest holder with over $655 billion in government bonds.

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Across Europe, a total of 13 countries are among the significant holders of US government securities, while the Asia-Pacific region follows Europe with 11 different holders. Then, a ‘handful of smaller nations’ holds a surprising amount of US debt. With a population of 70,000, the Cayman Islands hold an amount of $284 billion, and it is worth mentioning that there are more hedge funds per capita there than in any other nation in the world.

In fact, the four smallest nations among the holders – the Cayman Islands, Bermuda, the Bahamas, and Luxembourg – have a total population of only 1.2 million people, but hold an incredible $741 billion in US government bonds.

Decline in Demand

Meanwhile, during 2022, foreign demand for government bonds fell by six percent as higher interest rates and a strong US dollar made holding these bonds less profitable. Specifically, rising interest rates on US debt reduce the present value of their future payments, and in the meantime, their prices are also falling.

As the diagram below shows, this decline in demand represents a sharp turnaround compared to the period between 2018 and 2020, when demand surged as interest rates were at historically low levels. A similar trend occurred in the decade following the financial crisis of 2008 and 2009, when US debts effectively tripled from two to six trillion dollars. The driver of this trend was the rapid purchase of government bonds in China, which peaked in 2013 at $1.3 trillion. As the country’s exports and production expanded, it sold yuan and bought dollars to alleviate exchange rate pressure on its currency.

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Looking from today’s perspective, the uncertainty of global interest rates, which can affect the valuation of national currencies, and thus the demand for government bonds, continues to be a factor influencing the future direction of foreign US debt.