What are key reasons for foreign investments in Treasury securities?
For investors in other countries, including central banks, Treasury securities are attractive to hold since they are considered by market participants to be the premium risk-free asset and are liquid. Also, the dollar is considered to be the world's dominant reserve currencyAn international currency used by non-residents as a medium of exchange, a unit of value, and a store of value. The U.S. dollar is presently considered to be the world's dominant reserve currency.:
- The dollar was involved in 87 percent of activity in global foreign exchange markets in April 2013; the euro was second at 33 percent. (Because foreign exchange transactions involve two currencies, total transactions by currency sum to 200 percent.)
- Reported foreign exchange reserves held by other countries are heavily concentrated in dollars. The International Monetary Fund relies on voluntary reporting from countries and not all countries report the currency composition of their reserves.
As shown here, the share of debt held by international investors increased between 2000 and 2012, continuing a trend that began in the 1970's. The increasing share of foreign ownership is due in part to persistent federal budget deficits and low domestic saving. In addition to federal dissaving (persistent federal deficits), U.S. household saving over the last two decades has been lower than in the decades prior. However, an economy open to international trade and investment, such as the United States, essentially can borrow the surplus of savings of other countries to finance more investment than U.S. national saving would permit. The flow of capital into the United States has gone into a variety of assets, including Treasury securities, corporate securities, and direct investment.