Public discussion regarding US government debt often emphasizes its daunting size, characterized as “too large” or “unsustainable.” However, for investors, the critical factors involve the details beneath the surface of these aggregate figures.
Unlike household or corporate debt, the nature of sovereign debt is influenced by who possesses it, the currency it is issued in, and the institutional frameworks supporting its use and trading. Viewed through this perspective, US debt increasingly resembles financial infrastructure rather than merely a balance-sheet liability.
Currently, the US has a debt-to-GDP ratio of approximately 128%, comparable to that of France, Italy, and the UK. Meanwhile, Japan’s ratio exceeds 230%, yet it navigates its debt without significant funding challenges. This discrepancy highlights that the real issue lies not in absolute debt levels but in foreign dependence. The US, with about 22% of its debt held by foreign entities, is unique in that a majority, around 75%, is domestically financed, which mitigates risks associated with external creditors.
In recent years, changes in who holds US debt have become notable. Japanese entities now lead as foreign holders, while China has decreased its ownership. This shift represents portfolio rebalancing rather than capital flight, indicating that the US is not reliant on a single external creditor.
Emerging players, such as stablecoins, are becoming integral to the demand for US Treasuries. These digital currencies are increasingly backing their assets with Treasuries, effectively converting transactional demand for US debt into consistent structural demand. This trend aids in stabilizing various market segments and provides liquidity backstops, although it remains primarily focused on shorter-duration securities.
Ultimately, US Treasuries are evolving from simple fiscal tools into critical elements of monetary infrastructure, reflecting deeper insights into their role in the financial system.
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