Recently, there have been some surprising changes in the US Treasury market. According to data from the U.S. Department of the Treasury, in January 2023, China and Japan, the two largest U.S. overseas creditors, raised $7.7 billion and $28.1 billion in U.S. debt, respectively, totaling $35.8 billion, the highest level in nearly 10 years.
This means that the two countries are accelerating their dependence on US debt and reducing their exposure to the US dollar. So, what about these sold U.S. bonds?Who is the "pick-up man" in this debt crisis?
Despite the aggressive sell-off of U.S. bonds by overseas investors such as China and Japan, the U.S. Treasury market is not oversupplied, but rather demanded. This is because domestic investors in the United States are actively taking over and becoming the new "taker" of U.S. bonds.
According to the U.S. Treasury Department, in January 2023, U.S. domestic investors increased their holdings of U.S. bonds by $280 billion, accounting for more than 70% of new U.S. bond issuance that month, a record high. Among them, U.S. commercial banks increased their holdings by $120 billion, the Federal Reserve Bank of the United States increased their holdings by $80 billion, U.S. private investors increased their holdings by $50 billion, and U.S. institutions increased their holdings by $30 billion.
The increase in holdings by these domestic investors not only made up for the increase in overseas investors, but also pushed down the yield of U.S. bonds.
Why are U.S. domestic investors still keen on U.S. bonds when overseas investors are selling U.S. bonds?There are multiple reasons behind this. First, domestic investors are cautious about the outlook for the U.S. economy, fearing a possible recession or inflation in the U.S. economy, so they seek safe-haven assets, and U.S. bonds, as the world's largest, safest and most liquid bond market, have naturally become the first choice.
Second, domestic investors in the United States are affected by the U.S. monetary policy, as the Federal Reserve released a signal of policy easing in early 2023, hinting that it will pause interest rate hikes, and may even cut interest rates, which makes the yield of U.S. bonds fall, and the relative attractiveness of U.S. bonds increases, prompting investors to advance U.S. bonds and lock in higher yields.
U.S. domestic investors were stimulated by U.S. fiscal policy, as the U.S.** passed a 2$3 trillion infrastructure bill, and a $1The $9 trillion COVID relief bills, which will lead to a further expansion of the U.S. fiscal deficit and debt, will also increase U.S. infrastructure investment and consumer spending, thereby driving U.S. economic growth and inflation.
Although the large increase in U.S. debt by domestic investors has temporarily alleviated the pressure of the U.S. debt crisis, it has also brought variables to the U.S. harvest plan. The U.S. harvesting plan refers to the U.S. exporting inflation and risks to the world through the issuance of U.S. dollars and U.S. bonds, and at the same time controlling the supply and demand of U.S. dollars and U.S. bonds, so as to achieve manipulation and exploitation of the global market.
The basis of this plan is the hegemony of the dollar in the international monetary system and the dominance of US bonds in the global bond market. However, both positions are increasingly challenged and threatened.
On the one hand, the sell-off of US bonds by overseas investors such as China and Japan shows their distrust of US debt and the US dollar, as well as their search for diversification and de-dollarization of asset allocation, which will weaken the demand and influence of the US dollar and US bonds.
On the other hand, the U.S. bonds of domestic investors, although temporarily supporting the exchange rate of U.S. bonds and the U.S. dollar, but also increase the financial vulnerability of the United States. Therefore, the harvest plan of the United States is not all smooth sailing, but full of variables and risks.
The latest changes in the U.S. Treasury market reflect the complexity and severity of the U.S. debt crisis, as well as the uncertainty and danger of the U.S. harvesting plan. Although the large number of U.S. bonds by domestic investors has eased the debt pressure of the United States in the short term, it has also brought variables to the U.S. harvest plan.
It remains to be seen whether the United States will be able to continue to use the hegemony of the dollar and US debt to harvest global wealth. For other countries and regions, how to deal with the US debt crisis and harvest plan is also an issue that needs to be considered and solved urgently.