Recently, the total U.S. national debt surpassed the $34 trillion mark for the first time, which is equivalent to more than $100,000 in debt for every U.S. citizen. In recent years, the scale of U.S. debt has snowballed and grown rapidly. However, the question we need to ponder is: Who is taking over these large amounts of US Treasuries?
To understand this question, let's first look at the holders of US Treasury bonds. According to the U.S. Treasury Department, holders are divided into two categories. The first is public holders, which account for 79 percent of the total U.S. Treasury bonds13%。Such holders include individuals, corporations, states or localities**, the Federal Reserve, foreign countries**, and other entities outside the United States**, such as Japan and China as major overseas holders of U.S. Treasuries. This is followed by U.S. trusts, joint and special accounts, and accounts that hold a small amount of tradable, accounting for 20 percent of total U.S. Treasury bonds87%。
However, contrary to what many people think, overseas investors do not account for a major share of US debt. In fact, domestic holders in the United States are the largest holders of U.S. Treasuries, with the Federal Reserve and federal** holding U.S. Treasuries remaining at around 40%. According to the latest data, six of the top 10 overseas holders of U.S. bonds increased their holdings of U.S. bonds in October this year, and four decreased their holdings. China sold U.S. bonds for the seventh consecutive month, with its holdings falling to $769.6 billion, below $1 trillion for 19 consecutive months and $97.5 billion in the first 10 months. Japan, the largest holder of U.S. bonds, increased its holdings of U.S. bonds by $11.8 billion in October, rising to $1,098.2 billion.
Overall, by the end of October 2023, the total amount of U.S. debt held by foreign investors was about $7,565 billion, accounting for about 22% of the total U.S. debt. Not only that, but the Federal Reserve is also massively ** US bonds, which makes the receiver of US bonds in the spotlight.
Given the sheer size of the U.S. debt and the rate at which it continues to grow, let's take a look at who exactly is taking over these U.S. Treasury bonds.
According to data released by Goldman Sachs, the largest buyers of U.S. Treasuries are actually domestic households and the nonprofit sector. So far this year, U.S. households have become the largest buyers of more than 70% of new U.S. Treasury bonds.
This is because the United States is currently in the middle to high interest rate phase, and the federal benchmark interest rate is at 525% to 55%. High interest rates have pushed up the coupon rate on newly issued U.S. Treasuries, allowing investors to earn higher returns. Historically, U.S. Treasuries have been treated as "risk-free" assets, with holders receiving interest every six months and repaying the principal at maturity. With the current interest rate on U.S. bonds close to 5%, it is to be expected that many households that focus on asset security choose to invest in medium- and long-term U.S. Treasury bonds.
For example, in mid-October 2023, the U.S. Treasury renewed $13 billion in 20-year Treasury bonds with a bid rate of 5245%。And on December 29, 2023, the U.S. Treasury auctioned $40 billion of 7-year Treasury bonds at a winning interest rate of 3859%。
However, it is important to note that individual U.S. investors who purchase U.S. Treasury bonds directly through the U.S. Treasury Direct** can only purchase $10,000 of savings bonds per person per year. Obviously, such a purchase volume cannot take on too much U.S. debt.
Therefore, there are other people who really "take over". The most important categories are the family and non-profit sectors. In addition to households, hedges** in the United States are also counted in this sector. These hedges** are doing a lot of basis trading on US Treasuries, profiting by taking advantage of the spread between the spot market and the ** market. In order to maximize profits, hedges** tend to trade with tens of times leverage. According to the data, by doubling the amount of funds through leverage, $100 million can operate billions of dollars worth of U.S. Treasury transactions.
However, even with large purchases and transactions by households and the nonprofit sector, they will struggle to fill the huge void left by the Federal Reserve and overseas creditors. Considering that Treasury yields began to fall after the Fed paused interest rate hikes, and hedges** are gradually seeking to exit, the next question is, who will be the next "pick-up"?
In the face of the growing size and holders of U.S. Treasury bonds, the U.S. is struggling to find new buyers who can take over.
Limited by the purchasing power of households and the nonprofit sector, as well as the constraints of hedging** in Treasury trading, the US needs to find new investors to take over these huge US Treasury bonds.
One possible option would be to seek more overseas investors, but this is not a viable solution, given the downward trend in overseas holdings of U.S. debt in recent years. China has sold off U.S. bonds for seven consecutive months, with its holdings falling to $769.6 billion, and Japan, as the largest holder of U.S. bonds, has also increased its holdings relatively conservatively. In addition, the Federal Reserve is also in the US Treasury bonds. Therefore, the United States needs to find other ways to fill this void.
At the moment, there is no clear choice for the receiver of US Treasuries. With the Fed pausing interest rate hikes and Treasury yields falling, hedges** are also facing a profit-taking exit and may no longer continue to buy Treasuries. As a result, the U.S. is looking for the next taker.
Overall, US Treasuries have already topped $34 trillion, and it is becoming increasingly difficult to find new buyers. The household and nonprofit sectors are currently the main buyers, but their purchasing power is limited. In addition, hedges** are also looking to exit. As a result, the U.S. needs to look further for new buyers to take over these huge U.S. Treasury bonds.