"U.S. debt collapse theory": Selling off U.S. debt to attack the United States?

Source: Zhibenshe

Last week, the U.S. financial market saw a "double kill" phenomenon of bonds and currencies: the U.S. dollar index fell 3%, breaking through 100; the 10-year U.S. Treasury yield soared (prices plummeted), once breaking through 4.5%.

Similar to the past market, a rumor about the high quality of U.S. Treasury bonds spread widely, and the Sino-U.S. trade war escalated rapidly, and the rhetoric of selling U.S. Treasury bonds to retaliate against the United States became popular, and some people once again worried about the collapse of U.S. Treasury bonds.

Will U.S. Treasury bonds collapse? What are the risks? Can we still invest?

The logic of this article

1. U.S. debt is the underlying asset of the global financial market

2. The possible impact of reciprocal tariffs on the U.S. debt market

3. Increasing allocation of U.S. debt to hedge against the risk of global financial turmoil

01 U.S. debt is the underlying asset of the global financial market

The concern about the collapse of U.S. debt comes from the rapid increase in federal debt in the United States in the past decade and the excessive debt repayment burden.

Recently, an exquisite rumor hit the "soft spot" of U.S. debt.

The general meaning is: 2025 is the peak year for the repayment of US government bonds, with $9.19 trillion in bonds maturing, and $6 trillion maturing in June, which means that US bonds will face repayment risks. Why is this rumor a sophisticated and high-quality rumor?

This data chart comes from Bloomberg. The data in the chart is true, and the accompanying text is half-true and half-false, carefully designed, but highly misleading, and highly caters to the appetite and preferences of Internet audiences.

The Zhibenshe Data Center deeply mined the data to crush this rumor, and will publish a detailed analysis in "Data Weekly 67: This recent US debt rumor fooled everyone! 》, here is a brief explanation:

First, in the issuance structure of U.S. Treasury bonds, short-term bonds with a term of less than one year account for 85% of the total recovery. This structure in which short-term debts account for the majority will result in a very high amount of outstanding repayments in the first quarter of any year when looking at the maturity data of U.S. Treasury bonds. Moreover, it is mainly short-term debts, which creates a false impression of repayment risk.

Second, the rumor information says that the U.S. Treasury debt due for repayment in 2025 is $9.19 trillion, and the U.S. Treasury debt due for repayment in 2024 is $27.4 trillion, and the maturity data may be underestimated.

Third, judging from the historical monthly debt repayment data of the U.S. Treasury Department (see the figure below), it has remained at around US$2 trillion in recent months. There is no problem of "US$6 trillion concentrated due in June".

It can be said that the rumor was only clarified, but the huge scale of US debt is still a fact. Is there a repayment risk for such a huge amount of US debt?

The following is understood from three perspectives:

First, in the global sovereign bond market, US debt is still quite competitive.

Since the financial crisis in 2008, the scale of US debt has expanded rapidly; however, the debt scale of major countries in the world, such as Japan and China, has also expanded rapidly and the leverage ratio has risen rapidly.

At the end of 2024, the scale of US national debt will be 36.2 trillion US dollars, and the leverage ratio (national debt/real GDP) will be 124%, the scale of Japanese national debt will be 1317 trillion yen, and the leverage ratio will be 216. The scale of Chinese debt (national debt + local debt + urban investment bonds) will be 147 trillion yuan, and the leverage ratio will be 109 (local debt and urban investment bonds are not included in the figure below).

Through a simple comparison of the above data, we will find several basic facts: the government debt of major countries in the world has grown rapidly and the leverage ratio is high; the United States, Japan and the euro zone have been in a stage of compressing leverage in the past three years, and China's leverage ratio is rising rapidly.

The most important thing is that to see whether a country's debt is risky, we cannot just look at the scale, but mainly look at the price. What price? Two prices: one is the government bond interest rate, and the other is the exchange rate.

In an open and free international financial market, prices are determined by global investors. Whether a national debt has credit or collapses is not decided by a certain person, institution or media, but by global investors. If global investors buy it, the interest rate of US debt will fall; if global investors sell it, the interest rate will soar (price plummets) until it collapses.

As of April 14, taking the price of 10-year Treasury bonds as an example, the United States is 4.46%, Japan is 1.45%, and China is 1.65%.

However, the interest rate of government bonds is easily distorted by the monetary policy of the central bank, so we need to look at the second price, that is, the exchange rate.

Take Japan as an example. Since 2013, the Bank of Japan has implemented a yield curve control policy to finance the Japanese government, resulting in a low interest rate level for Japanese government bonds, but the yen has been under tremendous downward pressure, and the US dollar against the yen has continued to rise from 70 to more than 160.

In some countries where finance has not yet been opened, their interest rates and exchange rates are controlled and intervened. Both prices cannot fully reflect the level of supply and demand, and it is difficult to warn and release risks. If prices are distorted for a long time, both national debt and foreign exchange are fraught with huge uncertainties.

From the perspective of the two types of prices, interest rates and exchange rates, US debt and the US dollar are still highly competitive. If global sovereign bonds and sovereign currencies are "scumbags," US debt and the US dollar are relatively good.

Of course, the sovereign debt problem is one of the most prominent economic problems in the world, and the debt of any country cannot expand indefinitely. The government must choose to compress its balance sheet and leverage ratio during economic recovery and boom cycles.

Today, the Chinese government is reducing debt and controlling local debt, but due to the need for economic stimulus, the national debt is growing rapidly and the deficit ratio is rising.

The US government is also reducing debt, and Trump's determination to reduce debt exceeds my expectations. Voters, investors, financial institutions, and governments in major countries around the world are extremely numb to debt expansion, loss of control, and decay, but Trump is actually serious about reducing debt, trying every means to generate revenue, even raising tariffs on a large scale, trying every means to reduce spending, and even cutting federal government agencies on a large scale. However, the US government's curbing of debt expansion and lowering the deficit rate will help improve the credit of US debt.

Second, US debt is the underlying asset of almost all large institutions and conglomerates in the world, and the 10-year US debt is the pricing anchor of global financial assets.

Financial institutions in major countries around the world use US debt as the underlying asset to build their own financial buildings. For example, the Bank of Japan holds more than 1 trillion US dollars, the Central Bank of China holds more than 700 billion US dollars, and the United Kingdom also holds more than 700 billion US dollars. These countries reserve US debt to issue their own currencies, and US debt has become the base currency of the base currency of these countries.

Then there are national sovereign funds, social security funds, and pensions. For example, the Saudi sovereign fund, the US pension, and the British pension all allocate US debt on a large scale in pursuit of asset security and liquidity.

Then there are the world's large private financial institutions, especially international insurance giants, which have all allocated large amounts of U.S. debt. International financial giants hold U.S. debt as underlying assets for a long time, and refinance or make other financial products through U.S. debt.

Finally, there are the world's major private financial groups. The world's big families and big financial groups pursue the security and stability of wealth, as well as the liquidity of assets, and they all allocate large amounts of U.S. debt.

Of the 36 trillion U.S. debt (U.S. Treasury bonds), U.S. investors (private institutions and individuals) hold 55%; the Federal Reserve holds 13%, and social security funds and others hold 7%.

Foreign investors hold 24%, and the holders are mainly overseas sovereign funds, central banks, social security funds, pensions, large financial giants, large conglomerates, and large families.

In addition to large-scale holdings by Japan, China, and the United Kingdom, Canada, Belgium, France, Ireland, and Switzerland each hold more than 300 billion U.S. debts, Singapore, India, and Brazil each hold more than 200 billion U.S. dollars, and Norway, Saudi Arabia, South Korea, Germany, and Mexico each hold more than 100 billion U.S. dollars.

Therefore, U.S. debt is the underlying asset of the global financial market, equivalent to the cornerstone of the global financial building. If U.S. debt collapses, the global financial market will be burned down.

02 Possible impact of reciprocal tariffs on the U.S. debt market

Whether Trump's reciprocal tariff policy will impact the credit of U.S. debt, or even shake the global status of the U.S. dollar and U.S. finance, this is the most worrying issue for global investors now.

In fact, the impact of reciprocal tariffs on the US and global financial markets has already occurred. The following is a deduction of its impact from the shallow to the deep:

First, reciprocal tariffs exceed market expectations, and there are great variables and uncertainties, which have caused market panic, global stocks have plummeted, gold and crude oil have both fallen, and capital has chosen to embrace treasury insurance. The US Treasury and sovereign bonds rose in the week when the policy was introduced.

Second, reciprocal tariffs impact US short-term inflation and increase expectations of economic recession.

There is no doubt that the reciprocal tariff policy will push up US short-term inflation and directly drive up US Treasury bond interest rates. However, reciprocal tariffs have no impact on US medium- and long-term inflation. The reason is that rising tariffs will reduce market demand. The prices of some commodities with weak demand elasticity will rise in the short term, but the prices of commodities with strong demand elasticity will fall. Therefore, the inflation rate will rise first and then fall.

It can also be deduced from this that the reciprocal tariff policy will reduce the US economic growth expectations, thereby reducing the price growth of equity assets, which is beneficial to fixed-income assets, that is, funds seek government bonds to avoid recession risks.

Third, while impacting international trade, reciprocal tariffs are also impacting financial markets, which may compress the financial supply and demand in the United States.

In the era of globalization and financialization, current accounts, capital accounts and financial accounts should be considered together, among which we focus on the relationship between trade and finance.

The United States is a country that exports US dollars and US dollar financial assets. It exports US dollars on one side and imports goods on the other. It is impossible to export US dollars and goods at the same time. In the United States, while the trade surplus is expanding, the net income of the financial account is also expanding.

Now, Trump is trying to increase tariffs to reduce the trade deficit and bring manufacturing back to the United States. My judgment is that Trump cannot achieve this goal, but he can promote the reduction of the US trade deficit, which means that the number of dollars circulating internationally will decrease, and naturally the demand for US financial assets will also decrease. Therefore, the other side of the reduction of the US trade deficit is the decline in net income of the financial account.

It is said that the US government is considering restoring the 30% tax on overseas investors holding US financial assets (it was abolished in the 1970s, and domestic investors retained this tax). If the policy is implemented, it means that the cost of holding US debts for overseas investors will increase, which will reduce the demand for US debts.

Therefore, the reciprocal tariff policy will not only impact the trade market, but also the financial market, which may shrink the size of the US financial market and reduce the demand and supply of US debts. For US debts, this is a short-term risk.

If the US debt yield rises, how will Trump respond?

The reciprocal tariff policy leads to a decline in the demand for US debts, causing the US debt interest rate to rise, and then increases the US debt burden. This is what Trump does not want to see and is also a constraint on his policy.

Trump hopes to deal with it through two policies:

First, while the demand for U.S. debt is declining, his rectification of the U.S. finances will reduce the scale of the deficit, thereby reducing the scale of government financing, reducing the supply of U.S. debt, balancing it, and ultimately stabilizing interest rates;

Second, he hopes that the Federal Reserve will accelerate interest rate cuts, and Trump has no power or ability to command Powell.

Fourth, if reciprocal tariffs trigger extreme situations, will U.S. debt collapse?

The so-called extreme situations are war and financial war.

Many people are worried that if a war breaks out, the United States will freeze U.S. debt held by overseas investors, or refuse to pay interest and default on the spot.

Historically, U.S. debt has never really defaulted, with only two accidents. One was when Britain launched a war against the United States and burned the federal treasury's account books. In the end, the federal treasury managed to get investors back and then pay interest. Another time, the interest payment to a small number of investors was delayed due to a technical failure. At other times, even in extreme situations such as World War II, the United States paid interest as usual.

If Trump's reciprocal tariff war evolves into a financial war, and a certain country sells off U.S. debt in a concentrated manner, will U.S. debt collapse? There is no doubt that U.S. debt will plummet, but it will not collapse. Why?

In this extreme case, the Federal Reserve will cover the bottom, and it will start the printing press to continuously purchase U.S. debt. The Federal Reserve is the "last buyer" of U.S. debt. In the past few crises, such as the 2008 financial crisis and the 2020 epidemic crisis, the Federal Reserve has purchased bonds, one of which announced an unlimited bond purchase, and finally turned the tide.

Data show that after this round of tightening policy, the scale of US debt held by the Federal Reserve has dropped from the highest point of 6 trillion to 3.8 trillion, releasing huge space for bond purchases.

This year, the Federal Reserve is in a cycle of interest rate cuts. Even if the US inflation rate rises in the short term, it will eventually fall. The Federal Reserve has enough room for interest rate cuts and bond purchases to cope with the risk of a decline in US debt. In May and June, the Federal Reserve will cut interest rates, and the annual interest rate cut should exceed 100 basis points, which will drive up US debt prices.

Therefore, as long as the Federal Reserve is still there, US debt will not default, and as long as the US dollar does not collapse, US debt will not collapse.

03 Increase allocation of US debt to hedge against the risk of global financial turmoil

Next, we will further explore the deep-seated impact of the reciprocal tariff policy on the US financial market.

First, we need to understand the relationship between the current account and the financial account (not considering the capital account for the time being).

In the past few decades, the United States has continuously produced US dollars and used US dollars to exchange for goods. While importing large-scale goods, it has also exported large-scale US dollars; overseas US dollars have flowed back to the United States through the purchase of financial assets such as US stocks and US bonds. Therefore, in the United States, the current account has a long-term deficit, while the financial account has a long-term surplus.

Based on this, it is reasonable for a country to maintain a certain trade deficit/surplus. However, if a country's trade deficit continues to expand and its financial surplus continues to expand, this is problematic. At least it shows that the price mechanism is malfunctioning, and the exchange rate, interest rate, labor price, raw material price, etc. are malfunctioning, and there is a lack of regulatory effect on commodity exports and capital investment.

In fact, the global economic imbalance is not a problem, but the continued deterioration of the trade deficit/surplus. Trump may not be clear about the principle, but his team and staff are very clear, and their goals and actions are very consistent.

The US government believes that the imbalance of the US economy is mainly manifested in excessive current account deficits and excessive financial account expansion. Conversely, reciprocal tariffs will reduce the financial account surplus while reducing the current account deficit.

Second, it is necessary to understand the relationship between the trade deficit and the fiscal deficit.

In most of the past half century in the United States, the trade deficit has expanded and the fiscal deficit has also expanded accordingly. Although the proportions are inconsistent, the trends are relatively consistent. Why?

The expansion of the US trade deficit means that the United States exports more dollars, and the Federal Reserve issues dollars by purchasing US bonds. Issuing more US dollar base currency requires more US bonds. Conversely, the logic is also valid. The US government issues more US bonds, and the Federal Reserve purchases more US bonds to issue more dollars and import more goods.

As a result, the US trade deficit and government debt expand at the same time; more trade deficits mean more debt burden.

In the global free market, overseas investors maintain strong demand for US dollars and US bonds, and the prices of US dollars and US bonds remain strong. This logic is fine.

However, if the prices in the global free market are distorted, as in the past few decades, this is very dangerous. In an environment of global price failure/inadequacy, the superficial prosperity may hide huge risks. Currently facing this uncertainty, on the surface, overseas investors such as China and Japan are still buying a large amount of US dollars and US bonds, and the latter is still strong, so the game of US trade deficit and financial surplus can continue to be played. But the hidden risk behind it is that the invisible tariffs distort international market prices, and there is no way to warn the risk of continued deterioration of trade deficits and fiscal deficits, leading to global economic imbalances and high debts of various countries that have lost their ability to adjust.

Therefore, Trump's reciprocal tariff policy attempts to reverse the US trade deficit, and at the bottom, it attempts to ease the fiscal deficit and alleviate the US debt problem. This is an issue worth tracking and exploring, and its essence is the contraction of the US government's balance sheet.

If the reciprocal tariff reduces the US trade deficit, it will also reduce the US financial surplus, and the overseas demand for US bonds will decline, which is likely to push down the price of US bonds; on the other hand, if the US government successfully reduces its debt and reduces the scale of the deficit, the scale of US supply will also decline, which is likely to push up the price of US bonds.

In addition, the Fed's interest rate cut will push up the price of US bonds, offsetting the pressure caused by the contraction of demand. The Fed's interest rate cut policy is actually to support the banking system to expand credit (loose credit), encourage the private sector to expand its balance sheet, take over the federal government that is shrinking its balance sheet, and then promote economic growth.

On the whole, the price of US bonds fell first and then rose.

If the US financial market shrinks, is it possible for overseas investors to sell US bonds?

In fact, in the 1990s, before the financial crisis in 2008, overseas investors overweighted US bonds. Moreover, the larger the scale of exports to the United States and the larger the trade surplus, the more US bonds they hold. After that, many countries began to reduce their holdings of US bonds or diversify their allocation of US bonds.

However, U.S. debt is the underlying asset of the global financial market. It is difficult to find such a large-scale, credit-worthy and liquid alternative. Sovereign funds, central banks, large financial institutions and large conglomerates have dumped U.S. debt, and it is unknown what products to allocate.

In the past fifteen years, China has strategically reduced its holdings of U.S. debt. The U.S. debt held by China has dropped from the high of $1.3 trillion in 2013 to $0.76 trillion (market value) in 2025, with a reduction of more than $500 billion. However, this data is misleading.

The U.S. holdings of U.S. debt announced by China only refer to the market value of U.S. debt held by China's State Administration of Foreign Exchange in U.S. custodian institutions, and do not include U.S. debt indirectly held by the State Administration of Foreign Exchange through large global bonds and other funds. Generally, when we analyze the actual amount of U.S. Treasury bonds held by China, we will add the total amount of U.S. Treasury bonds held by the European Clearing House in Belgium to the total amount of Treasury bonds held by China announced by the U.S. Treasury.

From the above figure, we can see that from the beginning of 2017 to 2024, China's U.S. debt holdings decreased by $292.1 billion, while Belgium increased its U.S. debt holdings by $262.4 billion during the same period. Therefore, the actual scale of China's reduction of U.S. debt holdings is much smaller.

In addition, with the advancement of reciprocal tariffs, the U.S. financial account surplus has shrunk, and overseas investors may hold fewer dollars and U.S. debts, which may also inhibit financial expansion in other countries.

Therefore, in the context of reciprocal tariffs, my judgment on the global financial market is:

First, as I said in my previous article, the reciprocal tariffs have impacted the US stock market and the global financial market, indicating that Trump's policies have bottomed out and the worst of the market has passed. With an investment period of 3-4 years, it is a good opportunity to enter the US stock and US bonds.

Second, the global financial market is still relatively turbulent this year, especially the stock market. There is a price risk in US bonds, but they will not collapse. It is necessary to increase the allocation of US bonds (without leverage) to hedge the risk of financial turmoil.

U.S. Treasuries are an interest-bearing asset with good credit and good liquidity. You can adopt a "attack and defend" strategy: when prices fall, you can retreat and lock in a higher coupon for a long time; when prices rise, you can attack and sell to obtain premium income.

In the era of global financial market turmoil, U.S. Treasuries are still the core asset for hedging risks.