The U.S. depends on the rest of the world to buy not just its goods, but its stocks and its government and corporate bonds too. There is, however, evidence that the rest of the world is not quite as interested in sending money here for those things anymore. If that gets worse, we could have a problem on our hands.
The U.S. buys a lot of goods from the world, but the world invests a staggering amount of money right here. You can get a sense of how much by comparing it to the size of the entire U.S. economy.
“Total foreign holdings of U.S. assets, bonds, equities, everything else, are like 60, 70%” of gross domestic product, said Brad Setser, a senior fellow at the Council on Foreign Relations.
Foreigners own 30% of Treasuries issued by the federal government, 30% of corporate debt and 20% of the stock market, according to calculations by Apollo Global Management. It’s mostly held by private investors looking to make money, said Setser. But they appear to be rethinking.
“When all U.S. assets are going down, that does suggest that foreign investors are reevaluating their U.S. exposure,” he said.
A Morgan Stanley analysis found foreign investors had been gradually reducing their exposure to the U.S. stock market since the beginning of the year, but they seemed to be staying in bonds.
That might have just changed slightly, said Andrew Karolyi, dean of Cornell University’s SC Johnson College of Business.
“There are a number of industry reports suggesting that there have been some outflows over the last week or so, most notably in the area of U.S. Treasuries and high-yield bond funds,” he said.
The change represents a tiny fraction of total foreign investment so far, Karolyi said.
Mark Williams, chief Asia economist at Capital Economics, said there’s fear abroad that the current administration is overturning the U.S. economy.
“A lot of global investors look at that and think, well, why would you do that? If you want to overturn things, then maybe we don’t want to be quite so exposed to U.S. markets as we were in the past,” he said.
That would become a problem if enough foreign investors back out of bonds in particular — less demand for bonds forces interest rates up.
“If interest rates on, say, Treasuries go up, that means it's going to cost more for companies to borrow. Means mortgages are going to cost more,” said Setser at CFR.
That’s the last thing you want, he said, if the economy is already slowing down.
