Expert's Harsh Truth: US Debt Unreliable! Global Investors Forced to Hold Their Nose and Buy

Reuters Finance App — Foreign investors’ holdings of U.S. debt have decreased from 50% in the early 2010s to about 30%, but signs of exit are still not obvious, mainly due to the lack of alternative assets with comparable depth and liquidity worldwide. Martha Kimball, Executive Director of the Yale Budget Experiment Laboratory, vividly compared the current awkward state of the U.S. debt market at a Senate hearing: U.S. Treasuries are like a “boyfriend in a romantic movie who knows something’s wrong but stays together anyway,” because there are no better options.

Kimball pointed out that the U.S. debt market is facing a paradox: “diminished attractiveness but investors are forced to hold on.” Persistent deficits, exploding interest payments, and doubts about long-term fiscal sustainability are making investors increasingly uneasy.

Foreign holdings drop from 50% to 30%, with annual deficits exceeding the 6% warning line

Foreign investors’ holdings of U.S. debt have fallen from 50% in the early 2010s to around 30%, indicating growing concerns about U.S. fiscal sustainability.

Over the next decade, the U.S. deficit as a percentage of GDP is projected to exceed 6% annually, well above the 3% international warning line. Continued high deficits will further increase debt burdens, raise fiscal risk premiums, and make long-term U.S. bond yields difficult to lower.

Annual interest payments surpass $1 trillion, potentially doubling to $2 trillion by 2036

U.S. annual interest payments have exceeded $1 trillion and are expected to double to over $2 trillion by 2036. In a high-interest-rate environment, debt interest costs are growing exponentially, becoming one of the largest pressures on the federal budget.

The surge in interest payments crowds out resources from other areas, further worsening the fiscal structure and creating a vicious cycle.

Eurozone attempts to attract investors

Kimball noted that the Eurozone is making initial efforts to attract investors, trying to play the “good Samaritan firefighter.” However, the depth, liquidity, and global acceptance of Eurozone bonds still lag far behind U.S. Treasuries. Short-term, U.S. debt remains irreplaceable; investors, though dissatisfied, “have no choice” but to continue holding.

Budget experts urge tax hikes and spending cuts, but difficult to implement before a crisis

Budget experts are urging Congress to quickly adopt reforms involving both tax increases and spending cuts. Recently, bipartisan senators proposed establishing a fiscal committee to provide political cover, but experts admit: without a major crisis, significant cuts are unlikely to be implemented. The 2022 UK bond market collapse, Japan’s debt and currency crises last year, and France’s political turmoil serve as lessons. Only when markets experience severe turbulence or a debt ceiling crisis looms will substantial fiscal reforms be possible.

Iran conflict pushes deficits higher, potentially reaching $2.13 trillion this fiscal year, or 6.6% of GDP

The Iran conflict has further driven up U.S. deficits. The Pentagon reports that the first six days of conflict cost $11.3 billion; Oxford Economics estimates this fiscal year’s deficit could reach $2.13 trillion, or 6.6% of GDP. If a war spending bill passes, deficits will expand further.

Under the dual pressures of war expenditure and high oil prices, U.S. fiscal sustainability issues become even more prominent. Market concerns over long-term risk premiums on U.S. debt continue to rise.

Editor’s Summary

U.S. Treasuries are losing appeal, but investors currently have “no choice” but to hold on. Yale Budget Experiment Laboratory vividly describes this awkward situation as “a boyfriend in a romantic movie who knows something’s wrong but stays together.” Foreign holdings have fallen from 50% to 30%, with annual deficits exceeding 6%. Annual interest payments have surpassed $1 trillion and are expected to double. Budget experts urge tax hikes and spending cuts, but implementation before a crisis remains difficult.

The Iran conflict has further increased deficits, potentially reaching $2.13 trillion this year (6.6% of GDP), worsening fiscal sustainability. Investors should watch for rising long-term risk premiums, difficulty in lowering yields, and progress in fiscal reforms amid geopolitical developments. The long-term attractiveness of U.S. debt continues to weaken, becoming a consensus in the market.

(U.S. 10-year Treasury yield daily chart, Source: YiHuiTong)

As of 10:31 Beijing time, the U.S. 10-year yield is at 4.26%.

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