Since June 2022, the U.S. Federal Reserve has largely reduced its holdings of U.S. Treasury debt as part of its quantitative tightening program, or QT, after having massively expanded them between March 2020 and May 2022, as part of its quantitative easing program, or QE. The graph we comment on here shows which institutional sectors took over from the Fed to absorb the paper issued by the Treasury.
The histograms illustrate changes in the relative weight of each of the US Treasury's creditors during the QE phase then during the QT phase. Since outstanding negotiable debt increased throughout the period, a decline in the relative weight of one of these sectors does not necessarily reflect net sales. In fact, since the beginning of the QT, all institutional sectors except the Fed have bought securities, but some sectors have bought less than others, so that their relative share has declined.
According to the financial accounts, it is mainly households and money market funds that have substituted for the Fed since the beginning of QT. The weight of the other sectors has varied little, except for that of foreign investors, which has declined over the entire period.
According to balance-of-payments data, this downturn was driven exclusively by the foreign official sector. In an effort to diversify their foreign exchange reserves, foreign central banks, governments and sovereign wealth funds partially shifted away from US federal debt, while foreign private investors such as insurers, pension funds and leveraged funds increased their exposure.
Additional data on leveraged funds' positions in the outright and derivative markets for Treasury securities allow us to refine this breakdown. The vast majority of hedge funds are domiciled abroad, mainly in the Cayman Islands, Luxembourg, Ireland or the Virgin Islands and, according to our estimates, since the start of the QT, the weight of these hedge funds among Treasury creditors has increased significantly unlike other foreign private investors.
At the end of 2024, the Fed, as well as official foreign investors, held just under 15% of US federal debt, outstripped by foreign private investors, who held 18% . Resident and foreign hedge funds alone held 7%.
The turbulence caused by the announcement of US tariffs on April 2 did not spare the market US Treasury securities. While the safe-haven status of US federal debt was confirmed in the early days of the shock, we were reminded of its greater sensitivity to episodes of tension in the days that followed. Private investors have a very different investment model to that of official investors, particularly in terms of time horizon and risk profile, and it is not surprising that their growing weight is accompanied by greater interest rate volatility. But the unpredictability of the US administration and its questioning of multilateralism also risk damaging the confidence of a greater number of investors. Against this backdrop, and given the scale of the federal debt to be financed, the Fed could very soon put an end to its QT.
