So if the private sector doesn't buy and the Chinese won't buy, then it's up to #Fed QE! t.co/6P4Ic6ilmX
— CrossBorder Capital (@crossbordercap) July 20, 2023
Who Is Buying the Ballooning US Government Debt That Has Now Reached $32.5 Trillion?
There’s an ever-growing concern about who will purchase the skyrocketing US government debt that has ballooned to an alarming $32.5 trillion. The overwhelming demand for long-term Treasury securities can’t be ignored, as it’s causing yields to remain lower than anticipated. Instead of the 10-year yield being at an expected 6.8%, it is lingering at a mere 3.8%, with the 30-year yield not far behind. There are fears that yields may have to inflate to attract more buyers, with the simple principle of high yield equating to higher demand. Although this strategy works for junk bonds, the same can’t be said for Treasuries, at least not yet. Foreign buyers, especially from Europe, are still piling on to the buying spree. However, China and Japan, previously the two largest holders of Treasury securities, are shedding their holdings. As per the Treasury Department’s TIC data, the total amount of Treasuries held by foreign holders in May was $7.53 trillion, a slight drop from April’s record holdings, yet up by a marginal 2.4% from the previous year. The once significant holders, China and Hong Kong, have seen a decline in their holdings by 6.6% from a year ago, while Japan’s holdings dipped by 10.1%. This reflects their dwindling significance in the landscape of foreign holders of US debt. Meanwhile, another pressing concern looms on the horizon: the status of the US dollar as the global reserve currency is slowly but persistently declining, albeit not in a straight line.
The $133 Trillion Bond Market: The Collapse of the ‘Risk-Free’ Delusion
In 2022, US Treasuries experienced their worst year in American history, with the 10-year Treasury falling almost 18%, and the 30-year Treasury plunging over 39%. This collapse challenged the long-held belief that Treasuries are a risk-free, reliable store-of-value asset, pushing many investors to rethink their strategies. The global bond market, worth an estimated $133 trillion, is predicted to become a capital graveyard as the value stored in it may have to move elsewhere. Underpinning these developments are several critical factors. The US federal government’s enormous and rapidly growing debt (over $32.5 trillion) is unsustainable, with default being an inevitable but still uncertain outcome. The debt is expected to continue growing, and the recent weaponization of the US dollar and Treasuries, shown in the sanctions against Russia, has amplified political risks associated with these assets. Moreover, foreign interest in Treasuries has declined, with major holders like China significantly reducing their holdings. Given the scale of the federal debt, a return of interest rates to their historical average would result in an unsustainable interest expense, leading to a conclusion that the US government cannot allow interest rates to rise substantially. The Federal Reserve, using money created out of thin air, emerges as the only significant buyer of Treasuries, pointing towards a future of currency debasement. All these factors suggest that the US is headed towards financial repression that will potentially devastate bondholders and lead to a significant wealth transfer from savers to the political and financial elite. Dont be one of them.