Who has been the most significant buyer of US Treasuries since the 2008 global financial crisis? The US Federal Reserve? While US central bank demand forces have been meaningful, they have not been the overwhelming factor in US bond market demand, a September 15 report from Oxford Economics points out. Credit goes to emerging market central banks as well as the private sector.

Sources of US Treasury demand have moved in cycles with Emerging market central banks getting involved now

With the US Ten Year Note currently trading near 2.23%, after hitting a 2017 low of 2.01% earlier in the month, who in the world is buying US government debt?

It might not be who you think.

“The sources of demand for USTs have shifted enormously in the last ten years,” Oxford Economics’ Guillermo Tolosa wrote in a piece titled “Demand for Treasuries: the ‘official’ post-crisis story.” He notes that while the “consensus” thinks central bank quantitative easing is the primary culprit, “there is far more to this story.”

Rather than one buyer in the $14 trillion US Treasury market being the dominant force in demand, the reality has been more nuanced. In fact, the demand picture has been more of a cyclical affair, where the mantle of being the next buyer of US Treasuries has been passed around the globe.

Fed thank-you calls to Emerging market central banks

Immediately following the financial crisis, the Fed and other official actors around the world snapped up nearly 60% of the US Treasury’s $7 trillion in debt. But it was Emerging market central banks buying that “matched” initial Fed actions that “triggered a few thank-you calls from the Fed to their fellow foreign CB officials!”

From 2009 to 2014, for instance, it was foreign buyers, led by Emerging market central banks, that matched Fed bond purchases.

But this would soon change.

In late 2014 that demand fell off and the private sector was among the more dominant players in 2015 to 2016, Tolosa noted, as regulatory changes allowed for more easily holding US Treasuries.

“An important driver was that the supply of other US safe assets was squeezed, prompting the private sector to substitute into government paper,” he noted. Money market funds and investment by banks during this period rose by nearly $500 billion. Bank demand was particularly boosted by the establishment of a Liquidity Coverage Ratio (LCR) as part of the Basel Accords, a move Tolosa notes was designed to shore up liquidity buffers should a future crisis occur.

But as the private sector started to slacken, and the US dollar began to weaken, emerging market demand, which included Chinese buyers, once again came back.  Beyond a weakening US dollar, emerging market bond buyers, armed with a strong risk appetite, were banking on the stable growth differential between the US and other advanced markets.

While financial institutions played a significant role in boosting US Treasury demand, so, too, did the retail investor. Tolosa notes they likely were involved in purchasing $500 billion following the financial crisis, “the extent of their participation is not really known.”

Looking at the current demand panoply, foreign central bank and “official sector” buying has reclaimed the mantle of being a major bond player in 2017, snapping up $170 billion of US government securities through June. Furthermore, official sector demand is expected to continue. “The key demand driver is that strengthening capital flows,” Tolosa noted, pointing to motivations provided by a weaker US dollar and low volatility. All these factors “are improving emerging markets’ external positions, hence enabling EM to build up their reserves again. But if outflows start to materialize, particularly if they are motivated by portfolio repatriation, the demand picture could change and US rates could rise.

But it is not just a demand picture shaping the market balance.

Tolosa observes that “the existing supply-demand equilibrium has remained intact,” as the US Treasury had cut down on issuance as debt limit concerns have been brewing.