In recent years, there has been a noticeable decline in the proportion of U.STreasury holdings by foreign institutionsAs the Federal Reserve (commonly referred to as the Fed) has undertaken multiple rounds of quantitative easing and bond purchase programs, it has emerged as the second-largest holder of U.Sgovernment debtThis shift reflects significant changes in the U.Sbond market, a critical component of the global financial landscape.

The U.Sbond market stands tall as the largest in the world, with the interest rates on U.STreasuries representing a benchmark for the global risk-free rateThis positioning means that fluctuations in U.STreasury rates, such as the recent hike of the 10-year Treasury yield to approximately 4.6%, garner significant attention from global investorsA rate shift of this magnitude can stoke volatility across various asset classes and markets around the world, given the intertwined nature of international finance.

Tracing back to the roots of the U.S

bond market, one finds its inception during the tumultuous era of the American Revolutionary WarIn the late 18th century, the U.SCongress approved the federal government's obligation to repay debts accrued during the war, heralding the birth of U.STreasuriesBy the 1840s, most bond trading occurred on the New York Stock ExchangeYet, as the market matured and diversified, the trading of bonds began to shift predominantly to over-the-counter platformsThe advent of mortgage-backed securities (MBS) in the 1960s further complicated the landscape, emphasizing the need for robust regulatory oversight.

By the 1980s, the size of the U.Sbond market had expanded to become the world's largestAccording to data from the Bank for International Settlements, as of the first quarter of 2024, the balance of the U.Sbond market stood at a staggering $56.1 trillion, dwarfing that of China and Japan, which reported $23.0 trillion and $10.8 trillion respectively.

Examining the supply structure of the U.S

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bond market, by the end of 2023, the outstanding debt reached $56.9 trillion, covering various categoriesU.STreasury securities accounted for $26.4 trillion (45.4%), followed by MBS at $12.2 trillion (21.0%), corporate bonds at $10.7 trillion (18.5%), municipal debt at $4.1 trillion (7.0%), federal agency bonds at $2.0 trillion (3.4%), and asset-backed securities (ABS) at $1.6 trillion (2.7%). This breakdown elucidates the dominance of Treasury securities in the overall market.

In recent years, the issuance of U.STreasury securities, MBS, and corporate bonds has been concentrated, with averages over the past decade showing issuance of $3.1 trillion for Treasuries, $2.4 trillion for MBS, and $1.6 trillion for corporate bonds, accounting for 35.0%, 26.1%, and 18.9% respectivelyBefore the 2008 financial crisis, the housing market experienced a boom, leading to the bundling of numerous loans into MBS, which subsequently dominated the bond market.

However, the 2008 subprime mortgage crisis triggered a drastic decline in MBS issuance, compelling the federal government to implement a $700 billion bailout plan that amplified the fiscal deficit

This resulted in a surge in U.STreasury issuance, which took over as the primary instrument in the bond marketPost-crisis, the Fed's implementation of quantitative easing further lowered corporate financing costs, leading to a gradual resurgence in corporate bond issuance.

The nature of U.STreasuries can be classified as either marketable (liquid) or non-marketable securitiesMarketable securities are issued to the public and can be traded freely in the secondary market, while non-marketable securities are issued to specific institutions and require investors to hold them until maturity, comprising a smaller portion of the market.

Marketable Treasuries are further categorized into short-term bills (due within a year), medium-term notes (1-10 years), long-term bonds (over 10 years), Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRN). By the end of 2023, these securities had a share of 21.5%, 52.2%, 16.5%, 7.6%, and 2.2%, respectively, indicating the diversity of instruments available to investors.

Examining the demand characteristics, liquidity in the secondary market for U.S

Treasuries and MBS remains robust, with average daily transaction volumes for 2023 reported at $652.3 billion and $256.0 billion, respectivelyCollectively, they accounted for 67% and 26% of total market transactionsWithin the MBS category, liquidity varies significantly, with institutional MBS (backed by government-sponsored entities like Fannie Mae and Freddie Mac) commanding a daily transaction volume that constitutes 99% of the total MBS market.

The liquidity of U.STreasuries and institutional MBS can be primarily attributed to their large issuance sizes and low credit riskNevertheless, the liquidity of U.STreasuries has been constrained over time by factors such as budget deficits and the overall impact of quantitative easing, with turnover rates plummeting from 12.6% in 2007 to just 2.5% in 2023.

The diverse landscape of U.S

Treasury holders includes overseas investors (25.4%), mutual funds (18.3%), the Federal Reserve (11.8%), individuals and corporations (11.7%), banks (10.5%), insurance companies (9.7%), pension funds (4.9%), and government agencies (4.5%). Notably, foreign investors, mutual funds, and the Fed consistently occupy the top positions among U.STreasury holders, underscoring the multifaceted nature of this market.

Despite the enduring appeal of U.STreasuries, driven by their high liquidity, safety, and the status of the U.Sdollar as the world's reserve currency, we have observed a yearly decrease in the proportion of holdings by foreign institutionsThe Fed, having transitioned into the second-largest holder of U.STreasury securities after multiple rounds of asset purchases, has seen its share steadily decline since initiating its balance sheet reduction plan in November 2021.

In conclusion, the aftermath of the subprime crisis has seen the U.S