Recently, the news that China has sold US bonds on a huge scale has caused a lot of heated discussions. The move not only surprised the outside world, but also raised many concerns about US debt and global financial markets. China's massive ** has reportedly caused its holdings of U.S. debt to fall to just $778.1 billion, much to the unnerving of Fed Chair Jerome Powell. At present, the US national debt is as high as 33$9 trillion, accounting for about 10% of the world's total debt. Although the United States does not have the highest proportion of debt compared to other countries, its sheer size undoubtedly makes it a significant part of global debt. In the first half of 2023, according to the Institute of International Finance, the total global debt has reached $307 trillion, of which the United States accounts for more than 10%. Worryingly, however, despite the $25 trillion gross domestic product (GDP) of the United States, the debt-to-GDP ratio is as high as 134%. In addition, the United States will further raise the debt ceiling in the middle of this year, accelerating the trend of debt inflation. From the beginning of June 31 of this year4 trillion dollars to the current 339 trillion dollars, in just half a year. It is widely believed that the size of the US debt will exceed $40 trillion in the near future, and as the size of the US debt grows, the interest costs to be paid will also increase.
As the world's largest foreign exchange reserve, China's move has undoubtedly attracted great attention from all walks of life. Although China's holdings of U.S. debt are relatively large, they do not account for much of the world's total debt. According to the data, China's holdings of U.S. bonds account for only 2.0% of the total value of U.S. debt3%, while Japan's share of U.S. debt is 32%。However, the Federal Reserve is the real U.S. bond giant, holding nearly 5 trillion U.S. dollars, far more than China and Japan combined, and ranking 14th in the amount of U.S. debt88%。It can be said that the Fed, as one of the largest buyers of the U.S. bond market, has participated in the sale of U.S. bonds and the impact on the U.S. bond market cannot be underestimated. While the Fed claims that this move is to shrink its balance sheet and control inflation, there is no doubt that reducing losses is also a big reason for this. The Fed has now lost $120 billion. If the sell-off of U.S. bonds leads to a large number of U.S. bonds, which in turn makes it difficult to issue U.S. bonds, then the Fed's goal of shrinking its balance sheet and controlling inflation will not be achieved.
It is worth mentioning that domestic investors in the United States have become the main force in the purchase of US Treasury bonds, accounting for 76% of the share. In contrast, foreign investors' holdings of U.S. debt have declined over the past few years, from 34% to 24%. This trend suggests that the attractiveness of US Treasuries is waning for foreign investors, and that their main investment targets are more in other areas.
Over time, the size of the U.S. debt has grown, and so has the corresponding interest burden. In the past, the U.S. paid hundreds of billions of dollars in interest on U.S. debt each year has soared to more than a trillion dollars, and that number is growing. The U.S. has been borrowing for a long time, and the larger the debt, the greater the pressure on interest payments. Coupled with the fact that the Federal Reserve has raised interest rates since last year, the interest burden has exceeded previous levels. In fact, since the start of interest rate hikes, Treasury yields have also risen, from around 1% to a peak of 5%, and although they have now retreated, they can still reach around 4%, which is equivalent to four times the average yield in the past. This has led to a significant increase in the cost of buying U.S. bonds, and large creditors such as China and Japan, as well as the Federal Reserve, have taken up U.S. bonds, which has correspondingly had a huge impact on the U.S. bond market.
The action of China's ** US bonds has undoubtedly had a serious impact on the US bond market. Although China and Japan hold relatively high levels of debt, they are still not too large compared to the Fed. However, the sell-off of US bonds by China and other large creditor countries has raised concerns in the market. On the one hand, this may cause liquidity in the U.S. Treasury market to become tight, and even cause panic in the market. On the other hand, the actions of US bonds are also likely to exacerbate the instability of global financial markets and trigger a larger financial crisis. In fact, the ripple effects in global financial markets are far more complex and severe than we think. If the U.S. bond market crashes, it will have a devastating impact on the global economy, not only for the U.S. economy, but also for other countries. That's why the market is so concerned about China's massive sell-off of U.S. Treasuries.
China's large-scale U.S. debt has attracted widespread discussion and attention. At the same time, the expanding size of U.S. debt, the rising interest burden, and the Fed's sell-off have made the U.S. bond market face significant challenges and risks. For the global financial market, this is a severe test, and it is also a problem that needs to be paid attention to and solved. We need to be vigilant against market instability, strengthen regulation and coordination, and avoid the risk of financial crises and market crashes. For China, U.S. bonds are only part of the adjustment of the structure of foreign exchange reserves, and we should pay more attention to the development and structural adjustment of our own economy, and improve our investment ability and ability to resist risks. At the same time, the United States should also take its own debt problem seriously, take effective measures to reduce the scale of its debt, and effectively control the increase in the interest burden. Only through international cooperation and joint efforts can the global financial market develop more steadily and healthily.