The $8 trillion in US debt held abroad: The hot potato linking Trump and the world
Government bonds are losing some of their appeal, but foreign public and private investors are treading carefully, wary that large-scale selling could trigger financial turmoil
The yield on the benchmark 10-year U.S. Treasury, the linchpin of the global financial system, underpins trillions of dollars in lending worldwide and serves as the benchmark for pricing money across countless banking and financial transactions. Lately, however, it has become a growing source of concern for investors as yields have climbed amid persistently high inflation and expectations that interest rates will rise further.
For the U.S. government, higher yields translate into a heavier interest burden on its debt. For investors holding Treasuries, they mean falling bond prices and losses on existing investments.
More than a third of all outstanding U.S. government debt is held by foreign investors and central banks. Together, they own $9.32 trillion worth of Treasuries, a figure that illustrates not only how international capital helps finance America’s economic growth and mounting budget deficits, but also how those investments tie Washington to a vast network of overseas creditors.
The recent rise in Treasury yields has highlighted growing concerns about the long-term sustainability of U.S. public finances. With the national debt having surpassed $40 trillion, the U.S. government must continue issuing new debt to fund its operations and meet an ever-growing interest bill. At the same time, its foreign creditors can ill afford a sharp decline in the value of the Treasury securities they already hold.
The decision announced last week by Norway’s sovereign wealth fund to reduce its exposure to government bonds illustrates that dilemma. The move is expected to involve a roughly $75 billion reduction in U.S. Treasury holdings, although much of that money will remain invested in other U.S. fixed-income assets, such as mortgage-backed securities.
“Foreign investors have accumulated so many Treasuries and U.S. equities that they have as much to lose as Americans in a debt crisis,” said Nadia Gharbi, an economist at Pictet Wealth Management. “One would hope that the official foreign sector — major central banks and sovereign wealth funds — will join forces with the Federal Reserve to stem any threat of a U.S. debt meltdown and a global financial crisis.”
The largest foreign holder of U.S. debt is Japan, which owned $1.11 trillion in Treasuries as of June, according to U.S. Treasury data. That figure is little changed from a year earlier, though it has fallen from $1.23 trillion in January.
These are custody figures, meaning the ultimate owners of the securities are not necessarily Japanese and may include both public and private investors. Even so, Japan’s holdings are particularly significant at a time when yields on Japanese government bonds are also rising, offering domestic investors more attractive alternatives to U.S. debt.
Japan’s benchmark 10-year government bond now yields 2.8%, its highest level in three decades and a far cry from the near-zero rates that prevailed for years. For Japanese investors, borrowing in yen to buy higher-yielding U.S. Treasuries has long been a profitable trade. But that calculus could be changing, potentially weakening Japan’s position as America’s largest foreign creditor.
That was part of the backdrop to the unprecedented joint intervention launched by U.S. and Japanese authorities in late July to support the yen. An excessively weak Japanese currency can also destabilize the U.S. bond market if Tokyo is forced to defend it by selling dollar reserves and buying yen.
“A sell Japan can become a sell America,” said Judith Arnal, senior researcher at the Elcano Royal Institute. “If a sharp depreciation of the yen forces Japanese authorities to intervene, one way to obtain the dollars needed is to sell reserve assets, including U.S. Treasuries. A shock that begins in Japan’s foreign-exchange market can end up pushing up U.S. borrowing costs.”
But according to Nadia Gharbi from Pictet Wealth Management, “Although a structurally higher risk premium on U.S. debt is to be expected, the dollar’s status as the world’s reserve currency and the depth of U.S. capital markets give the country exceptional fiscal room for maneuver.” “We do not anticipate an imminent systemic sovereign debt crisis in the United States,” she added.
U.S. Treasuries remain the benchmark safe-haven asset of the global financial system, but they have become less attractive to some investors. The challenge is that any significant selloff would have repercussions far beyond the United States.
The United Kingdom is the second-largest foreign holder of U.S. government debt, with $939.9 billion in Treasuries. That figure largely reflects the custody business conducted through financial institutions in the City of London, the world’s second-largest financial center. It does not mean that the British government itself is Washington’s second-largest creditor.
China is the third-largest foreign holder, with $633 billion in U.S. government debt, a figure that has fallen by nearly $100 billion over the past year.
“China’s reduction is clearly part of a long-term trend, even if it is not selling every month,” Arnal said. “It has both geopolitical and financial reasons to diversify. Reducing its dependence on the dollar lowers its exposure to U.S. policy decisions and to the use of the financial system as a tool of pressure.”
Beijing remains Washington’s chief rival in the race for global economic and technological supremacy. Yet President Donald Trump’s complaints about the U.S. trade deficit, much of it attributed to China, have a financial counterpart: the United States has been able to fund the extraordinary growth of its technology sector and stock market in large part thanks to foreign investment.
As the U.S. Congress notes: “For decades, the United States has saved less than it invests. [...] Without foreign borrowing, U.S. income would be lower than it currently is net of foreign interest payments in this scenario.
Even so, Arnal stresses that the U.S. government is financed primarily at home. Roughly 70% of publicly held federal debt is owned by domestic investors and around 30% by foreign holders.
“That measure excludes debt held between federal agencies but includes Treasury securities owned by the Federal Reserve,” she said. “So it is not accurate to portray the United States as a country that is financed mainly by China or Japan.”
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