Panel discusses US Treasury market vulnerabilities amid declining foreign investment and inflation risks

On April 9, 2025, the U.S. House Committee on Financial Services convened to discuss the implications of U.S. Treasury debt within the broader monetary system, particularly in light of geopolitical tensions with China. The meeting highlighted concerns about the future of Treasury markets amid ongoing deficits and the potential for a decoupling from China, a significant holder of U.S. Treasury securities.

A key point of discussion was the current state of foreign investment in U.S. Treasuries. Experts noted that foreign ownership has decreased from over 50% two decades ago to approximately 30% today. This shift indicates a reduced vulnerability to foreign demand fluctuations, yet it raises concerns about reliance on U.S. financial institutions and hedge funds, which may introduce new risks. Dr. Forbes emphasized that while U.S. institutions have stepped in to fill the gap left by foreign investors, the need for foreign inflows remains critical to finance the current account deficit.

The committee members expressed apprehension about the potential consequences of a geopolitical shift towards a bipolar world, reminiscent of the Cold War. They questioned how such a scenario could affect Treasury markets and foreign purchases of U.S. debt. Mr. Webb pointed out the importance of maintaining a robust Treasury market infrastructure to manage volatility and ensure liquidity, regardless of who the buyers are.

Concerns were also raised about the implications of U.S. fiscal policy on inflation and the Federal Reserve's ability to respond effectively. The discussion highlighted the risk of stagflation, where rising prices could outpace economic growth, complicating the Fed's mandate to control inflation. The panelists acknowledged that if the U.S. cannot attract buyers for its debt, it may need to raise interest rates, which could exacerbate the existing fiscal challenges.

In conclusion, the meeting underscored the interconnectedness of U.S. fiscal policy, foreign investment, and the stability of Treasury markets. As the U.S. navigates its economic relationship with China and addresses its growing debt, the committee emphasized the need for careful management of fiscal policies to avoid a potential crisis in the Treasury market. The discussions set the stage for ongoing debates about the sustainability of U.S. debt and the strategies necessary to maintain investor confidence in the face of evolving global dynamics.