The share of U.S. Treasury debt held by foreign investors has declined from 50% in the early 2010s to approximately 30%, yet clear signs of a mass exit remain absent, primarily due to a global shortage of alternative assets with comparable depth and liquidity. Martha Kingbell, Executive Director of the Yale Budget Lab, vividly described the current predicament of the U.S. Treasury market during a Senate hearing, comparing U.S. Treasuries to "the boyfriend in a romantic movie you know is wrong for you, but you stay with because there's no better option." Kingbell pointed out that the Treasury market is facing a contradictory situation of "diminishing appeal forcing investors to continue holding." Continuously worsening deficits, explosive growth in interest payments, and doubts about long-term fiscal sustainability are making investors increasingly uneasy.
Foreign holdings have dropped from 50% to 30%, while the deficit is projected to average over 6% annually, significantly exceeding the international warning level of 3%. Over the next decade, the U.S. deficit as a percentage of GDP is expected to exceed 6% per year on average. Persistent high deficits will further increase the debt burden, raise fiscal risk premiums, and make long-term Treasury yields prone to rising rather than falling.
Annual interest payments have surpassed $1 trillion and are projected to double to over $2 trillion by 2036. In a high-interest-rate environment, debt interest payments are growing exponentially, becoming one of the most significant pressures on the federal budget. Soaring interest payments divert resources from other areas, further worsening the fiscal structure and creating a vicious cycle.
Kingbell noted that the Eurozone is making initial efforts to attract investors, attempting to play the role of a "well-intentioned firefighter." However, the depth, liquidity, and global acceptance of the Eurozone bond market still fall far short of U.S. Treasuries. U.S. debt is unlikely to be replaced in the short term, leaving dissatisfied investors with "no choice" but to continue holding it.
Budget experts are urging Congress to promptly implement reforms combining tax increases and spending cuts. Bipartisan senators recently proposed establishing a fiscal commission to provide political cover, but experts admit that without a major crisis, significant cuts are unlikely to be enacted. Precedents include the UK's bond market crash in 2022, Japan's currency and bond turmoil last year, and political instability in France. Substantial fiscal reform is likely only when faced with severe market turbulence or an imminent debt ceiling crisis.
Conflict involving Iran is further increasing the U.S. deficit. The Pentagon stated the cost for the first six days reached $11.3 billion; Oxford Economics estimates the deficit for this fiscal year could reach $2.13 trillion, accounting for 6.6% of GDP. If a war spending bill is passed, the deficit will expand further.
Under the dual pressures of military spending and high oil prices, concerns about U.S. fiscal sustainability are intensifying, and market worries about long-term risk premiums on Treasuries continue to rise.
While the appeal of U.S. Treasury debt is weakening, investors currently have "no alternative" and must continue holding, a situation aptly compared to staying with a problematic partner for lack of better options. Foreign ownership has dropped significantly, the deficit exceeds warning levels, and interest payments have broken records and are set to double. Experts urge fiscal reform, but action before a crisis is unlikely. The Iran conflict exacerbates the deficit, pushing sustainability concerns higher. Investors should be vigilant about rising long-term risk premiums, the upward pressure on Treasury yields, and monitor the progress of fiscal reforms and geopolitical conflicts. The consensus is that the long-term attractiveness of U.S. debt is steadily eroding.
The 10-year U.S. Treasury yield was reported at 4.26%.
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