A global financial industry organization has indicated that foreign investors are beginning to diversify their portfolios and reduce reliance on U.S. Treasury bonds as debt levels rise. According to a report released on Wednesday by the Institute of International Finance (IIF), net purchases of U.S. government bonds by foreign investors have remained steady this year, while allocations to Japanese and European sovereign debt have increased. The IIF represents approximately 400 banks, insurance companies, and asset management firms.

Recent market developments suggest early signs of portfolio diversification, particularly in cross-border government securities investments, wrote a team at the IIF, including analysts such as Emre Tiftik and Khadija Mahmood. They added that these trends partly reflect diverging debt trajectories, as the U.S. debt-to-GDP ratio is expected to continue rising, while Europe and Japan are on more moderate paths.

The report noted that the U.S. Treasury market has avoided liquidity pressures, supported by domestic demand. At the same time, foreign investor appetite for U.S. corporate bonds has remained particularly strong this year, despite a significant rise in oil prices since late February, when U.S. actions against Iran disrupted Middle Eastern exports.

So far, spillover effects from Middle East tensions have been limited beyond energy markets, the analysts wrote. Global risk appetite recovered quickly after the initial shock, with little indication of impending stress in debt markets.

The analysts pointed out that, over time, the conflict could push up the current global debt level—now near $353 trillion—as higher energy and food prices may force governments to borrow more at increased costs. If the Middle East conflict persists, sustained price pressures will translate into higher borrowing costs, they warned, noting that the risks are real.