What We Need To Know About US Debt

The Chinese have gone down while the UK is up.

At the end of March, China’s slice of the US treasuries pie decreased to $765 billion. Meanwhile the total held by UK investors rose to $779 billion. As a result, for the first time in 25 years, China is no longer the #2 foreign holder of US debt.

Instead, Japan and the UK top the list:

Fractal mathematician Benoit Mandelbrot once told us that the coast of England is much longer than we think. From a distance, it appears to be a smooth curve. However, an increasingly closer look reveals countless coves, crannies, and indents that make it much longer.

Similarly, looking at sovereign debt, we might think it is just about countries borrowing money. But there is much more.

US Debt

Debt Purchases

We can start by asking why China buys US treasuries. One answer is its trade surplus. Selling us so massive an amount of goods, China winds up with lots of dollars. Secure and sufficiently lucrative, treasuries were the logical destination.

Among those treasuries, they select maturity dates. One concern now is that China has boosted its short term holdings. Consequently, they can easily be sold:

Those treasury sales can become more of a problem because of tariffs. Japan even said it could bring up its treasuries during its tariff negotiations. Explained by the Penn Wharton budget model, fewer imports decrease the dollars buying US government bonds. As a result, they hypothesize that US households will make up the slack and channel less of their income toward productive capital.

Debt Downgrade

Then, to all of this we can add a debt downgrade.

Handy for investors, the grade given to a debt signals its riskiness. Our debt ceiling “standoffs,” our soaring deficit, and perhaps now our tariffs make the U.S. a less perfect borrower. As a result, two of the most respected ratings issuers–S&P and Fitch– recently pulled their grade for US debt down a notch from the highest level. Then, this week, the third ratings leader, Moody’s, did also.

Below, you could think of the U.S. as an issuer while the investor might be you, me, or China. The intermediaries, like investment banks, connect issuers to investors:

Our Bottom Line: How Countries Borrow

By selling different kinds of securities countries borrow money. They borrow that money from three groups of lenders. They borrow from banks, from private non-banks, and from official creditors.

1. The banks in the first group can be domestic and foreign.
2. The second group is varied and large. Taking us to all private investors that are not banks, the list includes hedge funds, corporations, and you and me.
3. Different from the first two groups, the last one is official. It takes us to government agencies, central banks, and international agencies. It includes the government of China, the World Bank, and parts of the U.S. government like the Social Security Trust Fund.

So, where are we? Answering our title, we need to know that Chinese tariffs and a lower bond rating will affect future US borrowing.

My sources and more: Thanks to FT for its article on China’s treasury purchases and also on Japan. Then Wharton’s budget model described the tariff connection. Finally, for the best explanation, do take a look at this Brookings paper on the treasuries market.

Please note that several of today’s sentences were in a past econlife post.