Britain Surges Past China as Major Holder of US Treasury Debt

Britain has ascended to the position of the second-largest holder of United States government debt, surpassing China, as hedge funds headquartered in London increase their exposure to US Treasuries. Over the past five years, holdings of US government bonds in the United Kingdom have nearly doubled, now standing at $865 billion dollars, according to official American statistics.

This significant shift in foreign ownership reflects the changing dynamics of global bond markets, with hedge funds, rather than central banks, emerging as the dominant buyers. London’s role as the world’s leading hub for hedge funds has been instrumental in this development, effectively making the city an asset manager for American government debt. Gennadiy Goldberg of TD Securities noted that London’s financial sector largely manages these US assets, highlighting the growing leverage and flexibility hedge funds employ.

The rise of Britain’s stake carries potential risks; hedge funds are considerably more reactive than traditional holders, such as national central banks. Their strategies can involve rapid and scaled trading, introducing the possibility of substantial price swings in response to political developments affecting American fiscal policy. Brad Setser of the Council on Foreign Relations cautions that the heightened reliance on leveraged investors means US Treasury yields could prove more volatile during periods of financial stress. A scenario similar to the market turbulence experienced in the UK under Liz Truss becomes more feasible under such conditions.

The Bank of England has recently raised the alarm regarding speculative hedge fund activities in domestic markets. Andrew Bailey, the Governor, has indicated the possibility of regulatory measures designed to limit excessive leveraged trading, which could trigger sudden sell-offs.

Investors continue to show faith in the American bond market, even as President Donald Trump pursues expansive fiscal policies, including tax cuts and increased spending. Since early this year, over $630 billion dollars of foreign capital has been channelled into US Treasuries, further elevating the total value of foreign-held debt, which surpassed the nine trillion dollar mark for the first time in March.

Britain now represents more than nine percent of overseas holdings of US government debt, second only to Japan’s thirteen percent. In contrast, China’s share has declined significantly since 2015, dropping to around 7.6 percent, though a portion of its investments may be concealed through holdings routed via Belgium. Marcello Estevão from the Institute of International Finance points out that the United Kingdom’s elevated figures are partially a function of market structure. Many holdings registered in London do not originate with British investors but rather reflect global clients utilising British banks, custodial accounts, and derivatives structures.

The surge in British-based engagement in the US government bond market has come to typify the increasing influence of hedge funds over conventional institutions, changing the landscape of global debt investment and affecting the potential vulnerability of the American financial system.