Summary of Key Points
The U.S. Treasury Department has recently doubled the scale of its long-term bond repurchases (from $2 billion to at least $4 billion per purchase) in an attempt to stabilize long-term bond yields. However, the effect has been short-lived, with yields rebounding quickly. Experts argue that this move is more of a "show of force" due to the relatively small amount of $4 billion in the vast U.S. debt market. The core issue behind the soaring long-term bond yields is not inflation, but a severe imbalance between supply and demand (excessive debt, AI competing for funds, and the possibility of Japan selling its holdings). The only entity that could truly make a difference is the Federal Reserve (Fed), but doing so would have significant side effects. Solving the U.S. debt crisis requires both "cutting expenses" and "increasing revenue" (waiting for economic growth); there is no shortcut. While the reduction in foreign buyer holdings may have a short-term impact, it is unlikely that they will abandon U.S. bonds on a large scale in the long term.
Why Isn't the Treasury Department's Repurchase Operation Effective? Like Throwing a Pebble into the Ocean
The Treasury Department's increase in long-term bond repurchases from $2 billion to $4 billion may seem substantial, but in the context of the nearly $40 trillion U.S. debt market, it's like throwing a pebble into the Pacific Ocean. Initially, the market noticed the entry of a "major buyer," and yields dropped slightly. However, it quickly realized that such a small amount of money could not alter the supply and demand dynamics, leading to a rebound in yields. Experts point out that this action is more for show, as the Treasury Department itself is struggling with its budget and such limited funds can only temporarily deceive the market.
The Rise in Long-Term Bond Yields is Not Due to Inflation, but to a Supply-Demand Imbalance
Many believe that inflation is driving up yields, but experts argue that current inflation (about 3.4% on the CPI scale) is not at an extreme level, and oil prices remain stable. The real problem is that "no one wants to buy long-term bonds, while there is too much supply." There are three main reasons for this:
1. Excessive Debt and Concerns About Implicit Default: The U.S. adds $2 trillion in debt annually, and the interest on this debt continues to accumulate. The market is concerned not about a technical default by the government, but about the government borrowing so much that it may force the Fed to print money, which would devalue the dollar and reduce the real value of U.S. bonds. As a result, yields must rise to attract buyers.
2. AI Competing for Funds: AI investment is booming, offering higher returns than U.S. bonds. If U.S. bond yields do not keep up, funds will flow into AI-related sectors, further driving up yields.
3. Japan May Sell Its U.S. Bonds: The Japanese yen has depreciated significantly, and Japan might sell its U.S. bonds to stabilize the exchange rate. If Japan were to sell a large amount, it would increase the supply of U.S. bonds and push yields even higher.
How to Solve the U.S. Debt Crisis? Either Cut Expenses or Wait for Growth; No Quick Fix
Experts emphasize that there is no immediate solution to the U.S. debt problem. Two approaches are possible:
1. Cutting Expenses: Reducing government spending, such as slashing the $1.5 trillion defense budget and streamlining waste in social security programs. This would be the most effective, but it faces significant political resistance.
2. Increasing Revenue: Waiting for economic growth, which would increase nominal GDP and the tax base, gradually covering the interest on the debt. Ideally, the proportion of interest payments to taxes (currently around 20%) could be reduced to below 10%. The government could also encourage large financial institutions to buy more U.S. bonds, but this is a voluntary measure.
One Thing to Avoid: Allowing the Fed to print money indefinitely to cover the debt, as this would lead to rampant inflation, and the central bank would not do so.
Are the Treasury Department and the Fed Working Together to Rescue the Bonds? Each Has Their Own Agenda
Recently, the Treasury Department has been issuing more short-term bonds and buying fewer long-term bonds, while the Fed buys $40 billion in short-term bonds each month. This may seem like coordination, but each has its own objectives:
- Treasury Department: Issuing short-term bonds with lower interest rates can temporarily reduce interest costs, but it only addresses the symptoms, not the root cause. With too many short-term bonds, the market may not be able to absorb them, and funds may still flow into AI-related sectors.
- Fed: Buying short-term bonds is a last resort. The market lacks major buyers, and bond prices are falling, driving up yields. The Fed steps in to ease liquidity, but it must not undermine its goal of controlling inflation, so its actions are limited.
Will Foreign Buyers' Reduction in Holdings Trigger a Crisis? Short-Term Impact, but Long-Term Changes Are Unlikely
Foreign investors hold approximately $10 trillion in U.S. bonds (one-quarter of the total). Their recent reduction in holdings may exacerbate the supply-demand imbalance and push yields even higher in the short term. However, it is unlikely that they will abandon U.S. bonds on a large scale in the long run. Global trade is primarily denominated in dollars, and countries with trade surpluses (such as China and Japan) need to invest their dollars. Since U.S. bonds are the safest and largest dollar-denominated assets, they will likely continue to buy them, as long as the dollar's global status remains unchanged.
Conclusion
The Treasury Department's efforts are largely symbolic, as the core issue of rising long-term bond yields is the imbalance between supply and demand. Solving the U.S. debt crisis requires painful fiscal adjustments and time to restore economic growth. There may still be volatility in the short term, but the global dominance of U.S. bonds is unlikely to be shaken in the long run. Ordinary investors do not need to worry too much about a "collapse of U.S. bonds," but they should be aware of the potential连锁 effects on global asset prices, such as stock markets and exchange rates.