U.S. Fixed-Income Market Expands; Foreign Ownership of Treasuries Falls to 30% Low

Overview

This macro-level fixed-income report from Deutsche Bank provides a detailed examination of the investor base in the $61 trillion U.S. fixed-income market. The report notes that since the global financial crisis—particularly during the pandemic—the share of U.S. Treasury securities in the fixed-income landscape has expanded significantly. As the Federal Reserve reduces its balance sheet and foreign demand weakens, domestic sectors (households, mutual funds, and commercial banks) have emerged as the primary absorbers of the federal budget deficit. In addition, the report breaks down the buyer profiles for mortgage-backed securities (MBS), credit bonds, and municipal bonds, and offers fair-value estimates for the 10-year Treasury yield along with long-term fiscal projections, based on various models.

Core views

The composition of U.S. Treasury buyers is shifting: domestic capital is stepping in. U.S. Treasury debt now accounts for 96% of GDP. Foreign investors’ share fell to 30% in Q1 2026, approaching the record low of 29% recorded in Q3 2023. Over the past year, official foreign holders have rotated out of long-dated Treasuries and bills into short-term T-bills. Meanwhile, domestic sectors—including households, banks, pension funds, and mutual funds—are providing the bulk of financing for the massive budget deficit. Primary dealers’ net holdings have risen sharply since 2022, and mutual funds now receive a larger share of short-term Treasury allocations than primary dealers. Shift in foreign allocation preferences: reducing Treasuries, increasing equities and credit bonds. While the dollar’s share of global foreign-exchange reserves is declining, it remains above 50%. Notably, China’s Treasury holdings continue to fall, yet data suggest it may have resumed buying U.S. equities in early 2026. Overall, overseas demand for U.S. credit bonds (investment-grade and high-yield) is rising, while demand for Treasuries and agency bonds is easing. Credit and MBS market dynamics: non-financial corporate debt as a share of GDP has retreated from a pandemic peak of 55% to 41%. The main buyers of credit bonds (investment-grade, high-yield, and loans) are insurers (28%), overseas investors (25.9%), and mutual funds (23.8%). Agency MBS ownership is relatively dispersed, with commercial banks holding 24.8% and mutual funds 16%. As mortgage rates have edged lower, mortgage activity has picked up slightly recently. Yield modeling and fiscal outlook: the report constructs two models for the 10-year Treasury yield. One incorporates central-bank purchases and suggests a current fair value of around 3.4%—consistent with recent trends—while the other, based entirely on market-driven factors, places fair value closer to 4.35% (as of June 12, 2026). Looking ahead, the Congressional Budget Office (CBO) projects that U.S. public debt as a share of GDP will continue to climb over the coming decades, and higher interest rates will cause interest payments to consume an ever-larger portion of the deficit.

Analysis framework

The report employs a comprehensive “capital flows and stock structure” decomposition. First, starting from the asset side, it categorizes the U.S. fixed-income market into four major segments—Treasuries, agency MBS, corporate/foreign bonds, and municipal bonds—and calculates each segment’s share of GDP to track changes in macro leverage. Second, on the holder side, leveraging data such as the Federal Reserve’s flow-of-funds tables, it dissects the stock positions and marginal purchasing behavior (e.g., auction allocation rates) of commercial banks, mutual funds, insurers, foreign central banks, and private-sector investors. Finally, using a multi-factor regression model for the 10-year Treasury yield, it compares modeled valuations with actual yields to assess the reasonableness of asset pricing.

Methodology notes

• Fixed Income and Credit Analysis

  Differences in Investor Price Sensitivity (Price Elasticity)

  The report highlights that different fixed-income buyers exhibit varying degrees of price sensitivity: the Federal Reserve and foreign central banks are relatively insensitive to price (focused on reserve management or policy objectives), whereas private-sector entities like mutual funds, hedge funds, and households are highly price-sensitive marginal buyers. Understanding these differences helps determine how much yield premium the market must offer to attract price-sensitive capital when certain buyers—such as foreigners—withdraw.

• Macroeconomic framework

  Multi-Factor Term Structure of Interest Rates Model

  The report develops an empirical model for the 10-year Treasury yield, decomposing it into long-term inflation expectations, short-term policy-rate expectations, term-risk premium, projected real GDP growth, official foreign holdings, and Fed flows and stocks. This disaggregation enables investors to quantify how much of the current long-end rate is underpinned by fundamentals versus driven by central-bank actions or supply-demand distortions.

• Macroeconomic frameworkCredit/debt cycle

  Government Debt as a Share of GDP and Interest-Expense Burden

  By analyzing Treasury debt as a percentage of GDP (96%) and the average public-debt interest rate (3.4%), the report assesses the long-term sustainability of U.S. finances. As the policy rate rises, refinancing existing debt will lead to a nonlinear increase in net interest payments, squeezing other fiscal expenditures—this framework lies at the heart of evaluating long-term bond-supply pressures and systemic macro risks.

Key data

• Total Size of the U.S. Fixed-Income Market61 trillion dollarsAs of Q1 2026
• U.S. Treasury Debt as a Percentage of GDP96%A significant increase from 75% pre-pandemic
• Foreign Ownership of U.S. Treasuries30%Q1 2026 data, near a historic low
• Non-Financial Corporate Debt as a Percentage of GDP41%Down from a pandemic peak of 55%
• Fair Value of the 10-Year Treasury Yield4.35%Based on a purely market-driven model (as of June 12, 2026)

Impact & implications

The report concludes that, with the retreat or balance-sheet reduction of two “price-insensitive” buyers—official foreign entities and the Federal Reserve—the U.S. Treasury market is increasingly reliant on domestic, price-sensitive investors—such as mutual funds and households—to absorb the large supply of new debt. This implies that if future fiscal issuance remains elevated, the market may need to sustain higher term premiums (yields) to attract sufficient capital. Meanwhile, the shift in foreign allocation from Treasuries to equities and credit bonds signals that global capital’s preference for U.S. assets is evolving from “risk-free preservation” to “seeking risk premia.”

Risks

• Continued expansion of the U.S. fiscal deficit driving a surge in Treasury supply
• An unexpected rebound in inflation pushing up term-risk premiums
• Accelerated foreign withdrawal from the Treasury market triggering liquidity volatility

What to watch

• The U.S. Treasury’s quarterly refinancing plan (changes in issuance mix)
• The scale and pace of the Federal Reserve’s Reserve Management Purchases (RMP)
• Monthly shifts in foreign central banks’ Treasury holdings, particularly those of China and Japan