US Treasuries That Underpin Dollar Hegemony Face Growing Pressure as China and Japan Pull Back

Shifting Demand for US Treasuries as Major Overseas Buyers Retreat
Continued Market Absorption Limits Immediate Disruption
Rising Borrowing Costs Likely to Weigh on US Fiscal Outlook

Cracks are beginning to emerge in the safe-haven status that has long underpinned the US Treasury market. As the nation's debt has climbed well beyond $39 trillion, demand from major foreign holders including Japan and China has also begun to soften, driving up Washington's financing costs at a rapid pace. While the US dollar continues to retain its dominance as the world's reserve currency, the conditions supporting Treasury financing are becoming increasingly burdensome.

$39 Trillion in National Debt, $1 Trillion in Interest Payments Test Fiscal Sustainability

On July 5 (local time), US business magazine Fortune reported that America's debt, once regarded as a source of national strength, has increasingly become a structural risk weighing on both the federal government and financial markets. The publication noted that, whereas strong global demand for safe-haven assets previously enabled Washington to finance massive fiscal deficits at relatively low cost, mounting national debt and surging interest expenses have now emerged as the market's primary concerns. The United States currently carries $39 trillion in national debt, with debt held by the public roughly equivalent to the size of the entire US economy. Annual net interest payments alone have exceeded $1 trillion, surpassing the defense budget, while total accumulated debt is approaching levels not seen since the aftermath of World War II.

The most significant shift in America's fiscal position is the structural increase in borrowing costs. As federal debt continues to expand rapidly while policy rates and long-term Treasury yields remain elevated, the cost of issuing new debt as well as refinancing existing obligations has risen simultaneously. Interest payments have consequently become one of the federal government's largest spending items, alongside defense and Social Security, raising concerns over a vicious cycle in which widening fiscal deficits require greater Treasury issuance, further pushing up borrowing costs.

Market perceptions have also begun to shift. US Treasuries have long served as the cornerstone of central bank foreign exchange reserves and corporate treasury portfolios while reinforcing the US dollar's position as the world's dominant reserve currency, thereby enabling Washington to exert financial influence across the global dollar system. Thanks to what has often been described as the United States' "exorbitant privilege," the federal government was able to borrow at costs far below what its fiscal risks would otherwise warrant despite maintaining expansive budget policies. More recently, however, investors have begun pricing in not only inflation risks but also deteriorating fiscal fundamentals and the growing supply of Treasury securities. Elevated long-term Treasury yields now reflect mounting concerns over widening fiscal deficits and increased debt issuance, and some market participants argue that so-called "bond vigilantes" have begun to reemerge.

Signs of Foreign Capital Retreat Become Increasingly Apparent

These developments have also raised fresh questions over the long-term sustainability of US public finances. America's debt-to-GDP ratio currently stands at around 100%. The Congressional Budget Office (CBO) projects that the ratio will rise to 175% by 2056. While that trajectory suggests the widely cited 210% threshold may still lie decades away, rapidly rising healthcare expenditures could significantly accelerate the timeline. According to the Penn Wharton Budget Model at the University of Pennsylvania's Wharton School, depending on assumptions regarding economic growth and healthcare cost inflation, the United States could reach its debt limit within 19 to 25 years. Should healthcare spending continue rising at its historical pace, the model estimates a 25% probability that the country could reach that threshold within just 14 years. That implies America's debt burden could emerge as one of the global financial system's most significant risks as early as the late 2030s.

Skepticism toward US Treasuries is far from new. Persistent fiscal deficits under President Donald Trump's second administration, coupled with growing controversy surrounding the independence of the Federal Reserve, have only intensified doubts about the safe-haven status of US government debt. As a result, the "Sell America" narrative has increasingly evolved into a recognizable market theme.

The composition of foreign demand supporting the Treasury market has also continued to change. According to Treasury International Capital (TIC) data released by the US Treasury Department, foreign holdings of US Treasuries totaled $9.353 trillion as of April this year. Japan remained the largest foreign holder with $1.2099 trillion, followed by the United Kingdom with $937.5 billion. China ranked third with $651.1 billion. The Cayman Islands followed with $471.6 billion, Belgium $459.9 billion, Luxembourg $431.1 billion, Canada $397.1 billion, France $393.3 billion, Ireland $345.3 billion, and Taiwan $300.9 billion.

Japan, however, is facing mounting constraints. Although it remains the largest foreign holder of US Treasuries, simultaneous yen depreciation and rising domestic interest rates are limiting its capacity to invest in overseas bonds. Following the outbreak of the Iran war in March, when surging oil prices and currency volatility rattled financial markets, Japan was among the first to liquidate dollar-denominated assets. It sold approximately $47 billion worth of US Treasuries during that period. From Japan's perspective, higher currency hedging costs combined with rising domestic government bond yields have significantly reduced the relative attractiveness of holding US Treasury securities.

China's Treasury Holdings Fall to Lowest Level Since 2008

China's continued reduction of its US Treasury holdings is also frequently cited by proponents of the "Sell America" thesis. Once the largest foreign creditor to the United States, China has reduced its Treasury holdings by roughly 50%, from $1.2 trillion in 2012 to $651.1 billion as of April this year—the lowest level since September 2008. The decline began accelerating in earnest in 2021, with the pace of reductions becoming increasingly pronounced. Last year, China ultimately fell behind both Japan and the United Kingdom, slipping to third place among foreign holders of US government debt.

Weakening confidence in US Treasuries has also become evident among long-term institutional investors such as pension funds. The Netherlands' civil service pension fund ABP, Europe's largest pension fund, nearly halved its holdings of US government bonds last year. Denmark's AkademikerPension, which manages retirement assets for teachers and other professionals, has likewise announced plans to reduce its Treasury allocation. Canada's Investment Management Corporation of Ontario (IMCO) has also emphasized the need to diversify its portfolio, citing uncertainty surrounding US fiscal policy and persistent inflation risks.

The selling pressure has added to strains in the Treasury market. According to Bloomberg, the yield on the 30-year US Treasury rose as much as 7 basis points to 5.20% on May 19. It marked the first time since July 2007, immediately before the global financial crisis, that the 30-year Treasury yield had reached 5.20%. On the same day, the benchmark 10-year Treasury yield climbed as much as 10 basis points to 4.69%, its highest level since January 2025.

Market participants generally expect central banks and institutional investors to continue gradually reducing their allocations to US Treasuries. In a survey conducted by global asset manager Capital Group, 72% of respondents said they expect US Treasuries' status as the world's premier safe-haven asset to weaken over time. While the dollar-centered financial system remains firmly intact, many see increasingly clear signs that the global financial landscape is gradually moving toward de-dollarization.

Nevertheless, the decline in Treasury allocations is not expected to trigger an immediate market collapse. US government bonds remain the world's largest and most liquid safe-haven asset, with central banks, pension funds, insurance companies, asset managers, and commercial banks continuing to maintain substantial exposure. Recent Treasury auctions have also continued to attract steady demand from both overseas investors and domestic institutional buyers, with new issuance being readily absorbed by the market and no evidence yet of supply-demand imbalances severe enough to impair market functioning. However, because investors now require higher yields than in the past to absorb new issuance, the US government's borrowing costs are continuing to rise at a significantly faster pace.