Who Will Buy US Treasuries?

The Japanese are now the largest holders of US debt ahead of the Chinese. Although the Japanese stockpile of is falling the Chinese are selling treasuries faster than the Japanese in order to support the Yuan in the face of massive capital outflow. Who will buy US treasuries if this keeps up? And how will the inability to finance US debt affect interest rates and the US dollar? Bloomberg reports that Japan overtakes China as the largest holder of U.S. treasuries.

China’s holdings of U.S. Treasuries declined to the lowest in more than six years as the world’s second-largest economy uses its currency reserves to support the yuan. Japan overtook China as America’s top foreign creditor, as its holdings edged down at a slower pace.

A monthly Treasury Department report showed China held $1.12 trillion in U.S. government bonds, notes and bills in October, down $41.3 billion from the prior month and the lowest investment since July 2010. The portfolio of Japan decreased for third month, falling by $4.5 billion to $1.13 trillion, according to the data. Collectively, the two nations account for about 37 percent of America’s foreign debt holdings.

Other countries holding significant amounts of US treasuries include Ireland, Cayman Islands, Brazil, Switzerland, Luxembourg, U.K., Taiwan and Hong Kong, all in the $100 billion to $200 billion range.

Borrowing, Interest Payments and Foreign Debt

According to the US Treasury web site, Treasury Direct, the expected interest paid on US debt in 2017 will be $51,696,798,645.73. Interest expense on debt outstanding is low for the amount of debt the US has because of historically low interest rates. According to the Center on Budget and Policy Priorities, our federal tax dollars are not enough to cover the budget and the government needs to borrow more each year.

In fiscal year 2015, the federal government spent $3.7 trillion, amounting to 21 percent of the nation’s gross domestic product (GDP). Of that $3.7 trillion, over $3.2 trillion was financed by federal revenues. The remaining amount ($438 billion) was financed by borrowing.

Thus the USA is paying $51 billion this next year on debt and adding debt each year. That debt will come on line at higher rates. But if foreign countries like China and Japan are selling their US treasuries how will the USA finance its debt? The choices are to reduce expenses or pay higher rates to attract buyers of US treasuries.

Social security takes 24% of the budget and health care subsidies take up 25%. Defense takes up 16% and various federal safety net programs take 10%. At the current time interest on debt uses of 65 of the budget.

If the two main buyers of US treasuries are selling them who will buy and how high will they bid up interest rates in order to take on more US debt? Higher interest rates will make the US dollar stronger which in turn will hurt US exports and jobs. Combine that with a Trump-inspired trade war and things could get nasty.