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Foreign Investment in U.S. Federal Debt:
Why Is It an Issue of Concern?
From an economic perspective, foreign holdings of federal debt can be viewed in the broader
context of U.S. saving, investment, and borrowing from abroad. For decades, the United States
has saved less than it invests. Domestic saving is composed of saving by U.S. households,
businesses, and governments. By accounting identity,7 when the government runs budget deficits,
it reduces domestic saving. By the same accounting identity, the shortfall between U.S. saving
and physical investment is met by borrowing from abroad. When the deficit rises (i.e., public
saving falls), U.S. investment must fall (referred to as the deficit crowding out investment) or
borrowing from abroad must rise. If capital were fully mobile and unlimited, a larger deficit
would be fully matched by greater borrowing from abroad, and there would be no crowding out
of domestic investment. To be a net borrower from abroad, the United States must run a trade
deficit (i.e., it must buy more imports from foreigners than it sells in exports to foreigners).8 Since
2000, U.S. borrowing from abroad and the trade deficit have each exceeded $300 billion each
year. Borrowing from abroad peaked at about $800 billion in 2006 and was approximately $677
billion in 2022.9 Borrowing from abroad has occurred through foreign purchases of both U.S.
government and U.S. private securities and other assets.
As a result of foreign purchases of Treasury securities, the federal government must send U.S.
income abroad to foreigners. If the overall economy is larger as a result of federal borrowing
(because the borrowing stimulated economic recovery10 or was used to productively add to the
U.S. capital stock, for example), then this outcome may leave the United States better off overallon net despite the transfer of income abroad. In other words, without foreign borrowing, U.S.
income would be lower than it currently is net of foreign interest payments in this scenario.
It can be argued that the underlying long-term economic issue is the budget deficit itself and not
that the deficit is financed in part by foreigners. This can be illustrated by the counterfactual.
Assume the same budget deficits and U.S. saving rates without the possibility of foreign
borrowing. In this case, budget deficits would have had a much greater crowding-out effect on
U.S. private investment, because only domestic saving would have been available to finance both.
The pressures the deficit has placed on domestic saving would have pushed up interest rates
throughout the economy and caused fewer private investment projects to be profitably
undertaken. With fewer private investment projects, overall GDP would have been lower over
time relative to what it would have been. The ability to borrow from foreigners avoids the
deleterious effects on U.S. interest rates, private investment, and GDP, to an extent, even if it
means that the returns on some of this investment now flow to foreigners instead of Americans. In
other words, all else equal, foreign purchases of Treasury securities reduce the federal
government’s borrowing costs and reduce the costs the deficit imposes on the broader economy.
The burden of a foreign-financed deficit is borne by exporters and import-competing businesses,
because borrowing from abroad necessitates a trade deficit. It is also borne by future generations,
because future interest payments will require income transfers to foreigners.11 To the extent that
the deficit crowds out private investment rather than being financed through foreign borrowing,
its burden is also borne by future generations through an otherwise smaller GDP. Because interest
rates were at historically low levels from the 2008 financial crisis to 2022, this burden had not
grown significantly given the increase in borrowing. Rates have risen since then, however, and
the burden has been rising with some lag as new borrowing has been made at the new higher rates
and old borrowing has matured and rolled over into new debt instruments with higher rates.12
Thus far, this report has considered the impact of the government’s budget deficit and the low
U.S. saving rate on U.S. Treasury yields but not investor demand. Since interest rates fell to
historic lows at a time when the supply of Treasury securities rose to historic heights, it follows
that Treasury rates have been driven mainly by increased investor demand in recent years. In the
wake of the 2008 financial crisis and again during the COVID-19 pandemic, investor demand for
Treasury securities increased as investors undertook a flight to safety. Treasury securities are
perceived as a safe haven compared with other assets because of low perceived default risk and
greater liquidity (i.e., the ability to sell quickly and at low cost) than virtually any alternative
asset. For foreign investors, their behavior also implies that they view the risk from exchange rate
changes of holding dollar-denominated assets to be lower than alternative assets denominated in
other currencies. The reasons for this flight to safety are varied. For example, investors who had
previously held more risky assets may become more averse to risk and seek to minimize their loss
exposure; investors may not see profitable private investment opportunities and choose to hold
their wealth in Treasury securities as a store of value until those opportunities arise; or investors
may need Treasury securities to post as collateral for certain types of transactions (such as
repurchase agreements) where previously other types of collateral could be used (or used at low
cost).
Flight-to-safety considerations have subsided as economic conditions have normalized, reducing
the incentive for foreigners to buy Treasuries and raising their yields, all else equal. But TreasuryForeign Holdings of Federal Debt
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securities are also sought out by international investors because of the dollar’s unique role as the
world’s reserve currency. As a result, Treasury securities are in permanent demand as underlying
collateral in financial transactions and as a temporary store of value while trade or financial
transactions are being executed.
More normal economic conditions would also be expected to increase domestic investment
demand, which would either push up domestic interest rates or lead to more foreign borrowing.
This relative movement in rates could attract additional foreign capital inflows.
Additionally, any discussion of foreign holdings of Treasuries would be incomplete without a
discussion of the large holdings of foreign governments (referred to as foreign official holdings in
Figure 3).13 Foreign official holdings are motivated primarily by a desire for a liquid and stable
store of value for foreign reserves. Relatively few assets besides U.S. Treasury securities fill this
role well. Depending on the country, foreign reserves may be accumulated as a result of a
country’s exchange rate policy, the desire to reinvest export proceeds, or the desire to build a war
chest to fend off speculation against the country’s exchange rate and securities. If motivated by
any of these factors, rate of return may be a lesser consideration for foreign governments than it is
for a private investor, although large, foreign official holdings have not been significantly
increasing since 2013—and fell in 2022—after more than a decade of rapid growth before then.
Since 1986, the United States has had a net foreign debt, and that debt was roughly $16.1 trillion
in 2022.14 Additional growth in net foreign debt would be unsustainable in the long run if it grows
faster than GDP, as it has generally done in recent decades. This net foreign debt has not imposed
any burden on Americans thus far, however, because the United States has consistently earned
more income on its foreign assets than it has paid on its foreign debt, even though foreigners
owned more U.S. assets than Americans owned foreign assets. Although it is likely that the
United States would begin to make net debt payments to foreigners at some point if the net
foreign debt were to continue to grow, it has not occurred yet. To date, the primary drawback is
the risk that its unsustainable growth poses, although that risk is slight in the short run.
Unsustainable growth in the net foreign debt could lead to foreigners at some point reevaluating
and reducing their U.S. asset holdings. If this happened suddenly, it could lead to financial
instability and a sharp decline in the dollar’s value. Alternatively, were the growth in the debt to
decline gradually, it is unlikely to be destabilizing.15
A related concern is whether the major role of foreigners in Treasury markets adds more risk to
financial stability. In other words, would financial stability be less at risk if the United States
borrowed the same amount from foreigners, but foreigners invested exclusively in private
securities instead of U.S. Treasury securities? Empirical evidence does not shed much light on
this question, although the fact that some foreign countries that experienced debt crises, such as
Ireland, had accumulated mainly private, not government, debts might suggest that avoiding
foreign ownership of government debt is not a panacea. Although countries such as Greece withForeign Holdings of Federal Debt
Congressional Research Service 8
large foreign holdings of government debt have experienced financing problems, a large share of
Italy’s large government debt was held domestically, and it has nevertheless faced financingproblems. The major role of foreign governments as holders of U.S. Treasuries could reduce
financial instability if foreign governments are less motivated by rate-of-return concerns, because
that implies they would be less likely to sell their holdings if prices started to fall. Finally, foreign
official holdings of U.S. debt may have foreign policy (as opposed to economic) implications that
are beyond the scope of this report.
What policy options exist if policymakers decided foreign ownership of federal debt is
undesirable? Absent strict capital controls, it is unlikely that foreigners could effectively be
prevented from buying Treasury securities. After Treasury securities are initially auctioned by
Treasury, they are traded on diffused and international secondary markets, and turnover is much
higher on secondary markets than on initial auctions. A foreign ban on secondary markets would
be hard to enforce because secondary market activity could shift overseas, and even if it could be
enforced, the U.S. saving-investment imbalance would likely shift foreign investment into other
U.S. securities—perhaps even newly created financial products that allowed foreigners to
indirectly invest in Treasury securities. Thus, a ban would not address the underlying economic
factors driving foreign purchases. Economically, the only way the U.S. government could reduce
its reliance on foreign borrowing is by raising the U.S. saving rate, which could be done most
directly by reducing budget deficits. Reducing deficits too quickly could be counterproductive however, if it undermined an economic recovery