A historic shift is underway in global capital flows, as overseas investors are increasingly ditching U.S. Treasurys in favor of American equities. This monumental reversal marks a significant loss of foreign appeal for U.S. sovereign debt, according to leading strategists.
"For the first time ever outside of the GFC, equity inflows into the U.S. have overtaken fixed income," highlighted George Saravelos, global head of FX research at Deutsche Bank, in a recent note. Deutsche Bank's analysis reveals a stark decline in foreign ownership of U.S. Treasuries, plummeting from over 50% at its peak to approximately 30% today. In stark contrast, holdings of U.S. equities by foreign investors have surged to all-time highs.
Saravelos attributes this intriguing divergence to a key factor: "Why do foreigners love U.S. equities but dislike U.S. bonds? Because the American private balance sheet is booming — AI, record profit margins — but the public sector balance sheet keeps worsening (6%+ deficits until the eye can see)."
Investor apprehension concerning persistent inflation and the escalating U.S. national debt has triggered a broader global bond sell-off recently. Yields on the benchmark U.S. 10-year Treasury note reached their highest levels since November 2023, with the 30-year note yield also experiencing a sharp increase.
The U.S. national debt surpassed $40 trillion last month, and the federal budget deficit is projected to hit around $2.1 trillion for the fiscal year ending September 30, equating to more than 6% of U.S. GDP, based on Congressional Budget Office estimates.
Illustrating this trend, Norges Bank Investment Management, manager of Norway's colossal Government Pension Fund – the world's largest sovereign wealth fund – has proposed a reduction in the share of government bonds within its fixed-income benchmark. If implemented, this change would decrease U.S. Treasurys from approximately 34.1% to 21.9% of its bond portfolio.
Other significant buyers of U.S. government debt have also scaled back their purchases. China, for instance, held about $633.4 billion of U.S. Treasurys as of June this year, a decrease from $731.4 billion just a year prior.
Meanwhile, foreign ownership of U.S. equities has hit unprecedented levels. The U.S. is projected to attract a record $600 billion in net equity inflows by March 2026, significantly outweighing investments in government and agency bonds "by the largest margin in history," as reported by Deutsche Bank.
Further emphasizing this pivot, investment powerhouse BlackRock is currently overweight U.S. equities, citing robust corporate earnings driven by the AI boom and a supportive macro environment. Concurrently, they are underweight long U.S. Treasurys. BlackRock noted in an August 31 memo that "Long-duration bonds... are a less reliable portfolio diversifier in the new regime."
