Blain’s Morning Porridge October 28^th, 2026 – Where Have All the Foreign UST buyers gone?

“Which is worse? Losing your fear of God or losing your belief in the US Treasury Market?”

The US treasury market is the deepest and most liquid market on the planet. But over the last year, foreign investors have been walking away. Why? Is it simply fear of a bear market from rising inflation and the rising quantum of US debt, or the sheer scale of the refinancing required. Or is it more fundamental in terms of geopolitics, a changing investment market, and better returns elsewhere. If so, it’s a lesson every country should absorb.

Link to Podcast

Key Takeaways

• A 60% tumble in US Treasury Purchases by “aligned” nations this year should be ringing bells in Washington. The USA can no longer assume the global economy will simply recycle capital into US Government Bonds.
• Slowing bond purchases don’t prove a buyer-strike. Rising inflation and the debt quantum hint at a bear market, while other asset opportunities may be more appealing. But changes in market patterns can swiftly become trends.
• The USA’s stupendous financing requirement to roll-over old debt while funding the deficit suggests yields will have to rise to attract investors.
• This makes the job of bond-salesman-in-chief, Treasury Secretary Scotty Bessent is… challenging.
• It can’t help the US is blamed from inflation from the Iran war and disrespect towards allies. Political competency is one key components of a sustainable bond market.
• The type of buyers and their investment strategies set the tone of any market. The US treasury market is still perceived as a risk-free asset, but the buyer base is no longer just central banks and real money – Hedge funds playing complex structured investment and quant strategies are now much more significant.
• Will foreign investors continue to regard US treasuries as the ultimate safe-haven asset in times of crisis.
• I guess we will find out.

There is a fascinating story on Bloomberg this morning – US Friendly Nations Slash Treasury Purchases by 60%, led by Asia. It’s buried deep in the market pages – but its highly illuminating.

It presents one simple fact – as the USA’s government debt soared through $40.4 trillion, the rest of the World bought less Treasuries. The nations that were once most closely aligned with the US politically and militarily have reduced their purchases of Treasuries by 60% in 2026. (The analysis runs from Jan through August, covering 57 countries public and private net purchases of Treasuries.) Japan bought just $389 million (yes, million, a rounding error) of Treasuries. Korea net-sold $23.8 billion, and “Taiwan was also a net seller” wrote Bloomberg.

There are lots of reasons why investors might be selling Treasuries. There is no absolute proof of a global buyer strike because investors are less willing to fund America because they are concerned about the rising debt quantum or government policies. Reasons to sell at the moment include the expectation of rising inflation and rising rates triggering a bear phase in the natural flow of the market. And it might be that global buyers perceive how the structure and therefore functioning of the Treasury market is changing – and how that changes its role as the ultimate stable, liquid “risk-free” asset.

Something has changed, and the dramatic reduction in global demand for Treasuries should be raising a number of concerns. The obvious one for a market that sees instability, uncertainty and conspiracy everywhere: is this the start of the US funding crisis? An Asian-based strategist at State Street is quoted in the article:

“An increasingly unpredictable US makes large structural overweights and the automatic recycling of capital into Treasuries harder to justify.”

One of my celebrated No Sh*T Sherlock awards is on its way to him.

For the purposes of the survey, aligned nations are those that most closely vote with the US in the United Nations – the most common way of determining America’s friends and enemies. Australia is the most aligned nation; China is the least (which is why the Ozzies are doing a big Submarine deal with the US). Interestingly, Mexico is counted in the neutral bucket.

There hasn’t been any like a major switch out of Treasuries by the nations aligned with the USA in decades, except in 2020 when Covid triggered serious selling to fund the cost of the pandemic. I guess the Taiwanese are familiar with the famous story about the US Stock Exchange: “There are 27 doors marked “Entry” but only one that says “Exit”.” That becomes a problem when someone screams “fire”.

Funnily enough I gave a lecture yesterday on Global Capital Markets to the latest class of post-grad finance students at the Edinburgh Business School, and debt was my theme. Before I spotted the Bloomberg article I talked around the risks of a US debt crisis. I explained how swiftly US debt had grown, how tax revenues were falling relative to debt, fears that the deficit could prove impossible to close, and how the USA’s rising GDP simply obscures its addiction to debt.

I talked about how the parabolic rise in debt was unlikely to be addressed by a gridlocked legislature over the next two years, a potential government shutdown adding to the sense of instability, and the risks around the inevitable end of the dollar’s “exorbitant privilege” as the global medium of trade (whereby the dollars received from dollar-denominated transactions are deposited into banks which then park the money into US bonds and bills) will cut technical flows into the US bond market.

I layered it all with Blain’s Virtuous Sovereign Trinity observation on top of my snap analysis; how any nation with a stable currency, a sustainable bond market and political competency is likely to do well, but if any of the legs of the Trinity break the whole edifice will wobble.

Things are looking set to unravel for the USA. Trump has proved himself the least politically competent president in American history – feel free to disagree with me on that one, but really? Global trade is splintering towards non-dollar currency settlement, and the US bond markets is under pressure. As I wrote last week – at 130% of GDP and the need to refinance its entire outstanding debt every 5.5 years (i.e. the total treasury new funding and refinancing need approaching $1 trillion every month) … who is going to be the buyer if the rest of the world walks away? (Foreign buyers are still 25% of the market.)

And that’s where this  get’s really interesting.

There was a time when the main “risk” assets prestigious real money institutional investors (pension funds and insurance companies) held were gold and government bonds. These provided the safety and limited secure returns to meet their long-term liabilities. Other investors considered bonds sacrosanct as part of a 60/40 portfolio. When I was “studying” finance at university the rule was “one’s percentage investment in bonds should match your age…” Er. No.

Today, even central banks have scaled back their investments in foreign government bonds for reserve management purposes – changing the degree to which Treasuries are the top of a very small list of eligible assets. As funds invest elsewhere, that raises an interesting liquidity problem – if central banks and critical funds invest outside traditional liquid markets – what happens if another liquidity crisis event occurs. (I guess the whip out the hammer and smash the red box with the flashing lights on the wall to release the QE Key!)

Today, the growth of financial markets and the need for all funds to demonstrate competitive returns means Government bonds have become a “risk-free” return handicap and drag on fund performance. Much better to invest for higher returns in structured debt and other products, like the equity slice of a data-centre debt CDO Cubed… perhaps… what can possibly go wrong? (US readers – sarcasm alert.)

One big trade we saw come close to collapse earlier this decade was LDI investments. When Liz Truss decided to test the gilts market to destruction with the most market destabilising budget in financial history, the immediate consequence of the sell-off in gilts was to trigger margin calls on highly leveraged Gilts plays. As the market froze, perversely, gilts were about the most liquid sterling market – therefore to meet margin calls on the crashing gilts market it would be necessary to sell gilts into it – trigger a negative feedback loop that… will it didn’t sink the market that day because The Bank and The Treasury were able to effect a swift solution.

Now the biggest players in US Treasuries are no longer foreign governments or US real money funds, but hedge funds playing complex quant-based, leverage magnified plays on the Treasury market, dissecting the comments of Scotty Bessent and the Fed for clues on how they might dance. I know many are betting that Bessent will resort bullying the Fed to use QE to bring down interest rates, creating a short-lived Treasury rally before they expect a massive inflation surge.

All the hedgies care about are the returns… That raises the law of consequences. What happens when the games that these financial children play start breaking windows or cause the whole market to meltdown. I can think of half-a-dozen scenarios whereby a levered/structured play on Treasuries goes serious awry causing a meltdown. I wonder how closely these risks are factored into financial stability risk assessments.

The good news for the Treasury market is that in times of crisis they may yet prove to be the ultimate safe-haven trade for US investors. But maybe less so for other nations.

Out of time and back to the day job…

Bill Blain

Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital

Meanwhile, don’t forget about my new book: The Battle for Hamble

You can read a review on the Society of Professional Economist’s website here.