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Which Countries Own the Most U.S. Debt?

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Foreign Countries Holding the Most U.S. Debt

The Foreign Countries Holding the Most U.S. Debt

In the international finance system, U.S. debt can be bought and held by virtually anyone.

In fact, if you hold a U.S. Treasury bond or a T-Bill in your portfolio right now, you are already a creditor to the United States government.

And as you can see in today’s chart from HowMuch.net, foreign countries like China and Japan can also accumulate large positions in U.S. Treasurys, making them significant players in the overall United States debt pie.

U.S. Debt: The Big Picture

The United States federal debt currently sits at $22 trillion, and it’s held by a range of domestic and foreign investors.

EntityDebt HoldingsShare of Total
U.S. Government and Federal Reserve$8.1 trillion36.8%
Foreign and international$6.3 trillion28.5%
Mutual funds$2.06 trillion9.4%
Pension funds$0.92 trillion4.2%
Banks$0.77 trillion3.5%
State and local governments$0.69 trillion3.1%
Other investors$3.18 trillion14.5%
Total$21.97 trillion100.0%

As you can see, about $8.1 trillion of debt is held by departments of the U.S. government or the Federal Reserve. This number would include securities sitting in retirement accounts of federal employees, social security trust funds, or any of the Treasurys sitting on the Fed’s balance sheet.

Next, another $7.6 trillion of debt is held by domestic investors. These are marketable securities held by banks, mutual funds, pension funds, insurance companies, and other investors.

While debt held domestically is mostly uninteresting, a bigger question mark is the $6.3 trillion of debt that is owned by foreign countries. After all, couldn’t a country like China “weaponize” its large holdings of Treasury securities as a form of retaliation in the ongoing trade war?

Foreign Owners of the Debt

Internationally, the biggest owners of debt include China and Japan, each with over $1 trillion.

RankCountryU.S. Debt HoldingsPercentage of Foreign U.S. Debt Held (%)
#1🇨🇳 China$1.11 trillion17.3%
#2🇯🇵 Japan$1.06 trillion16.5%
#3🇧🇷 Brazil$307 billion4.8%
#4🇬🇧 United Kingdom$301 billion4.7%
#5🇮🇪 Ireland$270 billion4.2%
#6🇨🇭 Switzerland$227 billion3.5%
#7🇱🇺 Luxembourg$224 billion3.5%
#8🇰🇾 Cayman Islands$217 billion3.4%
#9🇭🇰 Hong Kong$206 billion3.2%
#10🇧🇪 Belgium$180 billion2.8%
#11🇸🇦 Saudi Arabia$177 billion2.8%
#12🇹🇼 Taiwan$171 billion2.7%

Why does China hold so much of the foreign-owned U.S. debt?

China has accumulated Treasury securities over decades, as part of its strategy to keep its domestic currency from strengthening. Interestingly, the export-heavy nation has reduced its swath of Treasurys in recent months, selling off close to $200 billion of them.

Treasury Holdings China vs. Japan

Although China has $1.11 trillion of Treasurys left in reserve, the general consensus is that dumping all of them at once would destabilize the global financial system, having an equally negative effect on China as well.

That said, with foreign nations holding U.S. debt, such a risk will always exist.

Gimme Shelter

While it’s not surprising to see countries like China, Japan, or Brazil on the list of top foreign debt holders, what are places like the Cayman Islands, Luxembourg, or Ireland doing on the list?

Two simple facts help to explain these anomalies.

Firstly, despite having a population of just 60,000 people, the Cayman Islands is a hedge fund capital with over 10,000 funds domiciled there. Luxembourg makes the list for similar reasons, given that it is the European-based tax shelter equivalent.

Ireland, on the other hand, is the overseas headquarters for many U.S.-based tech giants like Facebook or Alphabet. Apparently, these corporations like to hold their overseas profits in highly-liquid Treasurys, rather than paying a repatriation tax to bring the cash back to American soil.

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Markets

Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Small- and mid-cap stocks have historically outperformed large caps. What are the opportunities and risks to consider?

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A line chart showing the historical return performance of small-, mid-, and large-cap stocks.

 

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The following content is sponsored by New York Life Investments
An infographic comparing low-, mid-, and large-cap stocks, including an area graph showing historical returns, a bubble chart showing how much $100 would be worth over 35 years, a horizontal bar graph showing annualized volatility, and a line graph showing relative forward price-to-earnings ratios, that together show that mid-cap stocks present a compelling investment opportunity.

Beyond Big Names: The Case for Small- and Mid-Cap Stocks

Over the last 35 years, small- and mid-cap stocks have outperformed large caps, making them an attractive choice for investors.

According to data from Yahoo Finance, from February 1989 to February 2024, large-cap stocks returned +1,664% versus +2,062% for small caps and +3,176% for mid caps.  

This graphic, sponsored by New York Life Investments, explores their return potential along with the risks to consider.

Higher Historical Returns

If you made a $100 investment in baskets of small-, mid-, and large-cap stocks in February 1989, what would each grouping be worth today?

Small CapsMid CapsLarge Caps
Starting value (February 1989)$100$100$100
Ending value (February 2024)$2,162$3,276$1,764

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Mid caps delivered the strongest performance since 1989, generating 86% more than large caps.

This superior historical track record is likely the result of the unique position mid-cap companies find themselves in. Mid-cap firms have generally successfully navigated early stage growth and are typically well-funded relative to small caps. And yet they are more dynamic and nimble than large-cap companies, allowing them to respond quicker to the market cycle.

Small caps also outperformed over this timeframe. They earned 23% more than large caps. 

Higher Volatility

However, higher historical returns of small- and mid-cap stocks came with increased risk. They both endured greater volatility than large caps. 

Small CapsMid CapsLarge Caps
Total Volatility18.9%17.4%14.8%

Source: Yahoo Finance (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Small-cap companies are typically earlier in their life cycle and tend to have thinner financial cushions to withstand periods of loss relative to large caps. As a result, they are usually the most volatile group followed by mid caps. Large-cap companies, as more mature and established players, exhibit the most stability in their stock prices.

Investing in small caps and mid caps requires a higher risk tolerance to withstand their price swings. For investors with longer time horizons who are capable of enduring higher risk, current market pricing strengthens the case for stocks of smaller companies.

Attractive Valuations

Large-cap stocks have historically high valuations, with their forward price-to-earnings ratio (P/E ratio) trading above their 10-year average, according to analysis conducted by FactSet.

Conversely, the forward P/E ratios of small- and mid-cap stocks seem to be presenting a compelling entry point. 

Small Caps/Large CapsMid Caps/Large Caps
Relative Forward P/E Ratios0.710.75
Discount29%25%

Source: Yardeni Research (2024). Small caps, mid caps, and large caps are represented by the S&P 600, S&P 400, and S&P 500 respectively.

Looking at both groups’ relative forward P/E ratios (small-cap P/E ratio divided by large-cap P/E ratio, and mid-cap P/E ratio divided by large-cap P/E ratio), small and mid caps are trading at their steepest discounts versus large caps since the early 2000s.

Discovering Small- and Mid-Cap Stocks

Growth-oriented investors looking to add equity exposure could consider incorporating small and mid caps into their portfolios.

With superior historical returns and relatively attractive valuations, small- and mid-cap stocks present a compelling opportunity for investors capable of tolerating greater volatility.

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