Canada poised to become a top-three holder of U.S. government debt

Canada is on track to surpass China as a top-three holder of U.S. government debt before 2028, with Canadian accounts now holding US$426 billion worth of U.S. treasury securities.

That figure is up more than 300 percent from US$106 billion in 2021.

Bond market experts say part of that increase is simply the result of Canadian investors snapping up more treasuries as the interest rates they offer have grown.

READ MORE: Higher diesel prices threaten to push up food costs this winter

READ MORE: Experts say an all-Canadian Thanksgiving feast is achievable on a budget

But the data includes all treasuries held in Canada-domiciled accounts, regardless of who owns them, leading some experts to believe China is moving its U.S. debt holdings into Canadian accounts.

"There is a background there that could suggest China certainly could have an intermediary take a treasury position in Canada," said Tiffany Wilding, an economist at Pacific Investment Management Co.

Officially, Chinese holdings of U.S. treasuries have plummeted roughly 40 percent to barely US$600 billion from more than US$1 trillion in 2021.

However, China is widely known to use intermediaries in other countries to hold treasuries, according to Wilding.

It is impossible to know for sure whether China is the driving force behind the rising U.S. treasury holdings in Canada, partly because the data suffer from "custodial bias," where holdings are attributed to the country where the assets are held.

The possibility of China being the source of this activity makes it additionally challenging to confirm, as details of the government's official foreign exchange allocations are considered a state secret.

With Chinese bonds yielding far less than their U.S. equivalents, there is a disconnect between the drop in China's official holdings and the strong demand for U.S. bonds in China.

A Shanghai-based asset manager, who The Globe agreed not to name, said the spread between U.S. and Chinese yields is a driver for asset managers to seek every tunnel to get access to the U.S. bond market.

China's involvement "helps explain a lot of what is going on," said Doug Porter, chief economist at Bank of Montreal, who noted Canada was on pace to surpass China as a U.S. treasury holder in a report published in late August.

Canadian holdings of U.S. treasuries are set to eclipse those of Belgium and China within 18 months, his report said, at which point only Japan and Britain will possess larger reserves of U.S. government debt.

"China is still investing in treasuries, just through other avenues," Porter said in an interview. "I think a lot of people had long suspected that. What is interesting is that some of that is being done through Canada."

Why China would want to obscure the true state of its U.S. treasury holdings is an open question.

There could be political reasons, such as a desire to give the impression that China's U.S. holdings are being reduced in response to continuing trade tensions.

Chinese law also classifies any plans to adjust foreign reserves as a state secret, which would be a natural motivation to prevent any foreign entity from accurately tracking the buying and selling of the country's U.S. treasury holdings.

Whatever the reason, China would likely not be violating any laws by purchasing U.S. securities through intermediaries around the world.

"There is nothing nefarious here, it is just not through the traditional channels, and perhaps they don't want to be seen as holding U.S. treasuries," Porter said.

Some of the increase in Canadian holdings, he said, can be explained straightforwardly by investors who are actually based here buying more U.S. treasuries.

"There is some fundamental increased investment in U.S. treasuries by Canadian investors too. I think some of it is real," he said.

Derek Holt, head of capital markets economics at Bank of Nova Scotia, said in an email that he was disinclined to believe China was the root cause of Canada's climb up the U.S. foreign creditor ladder.

What is a more plausible explanation, he said, is the growing yield spread between U.S. treasuries and Canadian government bonds.

"I'm not saying that I dismiss the China argument that it is spreading its holdings around," Holt said. "But I wouldn't have gone there first for plausible explanations of what we've seen."

Wilding said another possible explanation for the rise in Canada's U.S. treasury holdings is buying activity from Canada's eight largest pension funds, known collectively as the Maple 8.

The Caisse de dépôt et placement du Québec has doubled its holdings of U.S. treasuries to nearly $28 billion at the end of 2025 from roughly $14 billion at the end of 2021.

Ontario Teachers' Pension Plan data show its own positions have remained relatively unchanged.

"The OTPP data is a reasonable bellwether for the rest of the Maple 8 system, which suggests that they were not the ones to do this," Wilding said. "We are kind of scratching our heads on who it could be."

With files from The Globe and Mail