You must understand the terrifying chain reaction of the US debt dumping: from price fall to fiscal crisis.

U.S. Treasuries, known as the "safe harbor" of global financial markets, are essentially "IOUs" issued by the U.S. government when it borrows money from investors. These IOUs promise to repay the principal on a specific date and pay interest at an agreed rate. However, when countries or institutions that hold Treasuries choose to sell for various reasons, it will trigger a series of market reactions, which in turn will affect the US and even the global economy. This article will take Japan's holding of $1.2 trillion of US Treasuries as an example to analyze the price decline, rising yields, and far-reaching impact on US finances caused by the sell-off of Treasury bonds, and reveal the logic and risks behind this financial phenomenon. (Synopsis: JPMorgan CEO warns: U.S. debt "sooner or later" Fed or repeat the 2020 bailout script!) Will Bitcoin benefit from the rise? (Background addition: Bitcoin and U.S. stocks have rebounded after a historic week, but the market has completely changed) The Nature of U.S. Treasuries and Market Mechanisms U.S. Treasuries are debt instruments issued by the U.S. Treasury to finance fiscal deficits or support government spending. Each bond is clearly marked with face value, maturity date and interest rate. For example, a Treasury bond with a face value of $100, an interest rate of 3% per annum, maturing after one year means that the holder receives $100 in principal plus $3 in interest at maturity, for a total of $103. This low-risk nature has made U.S. Treasuries the darling of global investors, especially countries such as Japan, which hold as much as $1.2 trillion. However, government bonds are not limited to maturity. Investors can sell it through the secondary market for cash. The trading price of treasury bonds is affected by market supply and demand: when demand is strong, prices rise; When there is an oversupply, prices fall. Price fluctuations directly affect the yield of Treasury bonds and form the core of market dynamics. A hypothetical scenario for Japan to dump government bonds Suppose Japan decides to sell some of its U.S. Treasuries due to economic needs, such as stimulating domestic consumption or responding to exchange rate pressures, bringing a large number of "IOUs" of $1.2 trillion to the market. According to the principle of supply and demand, the supply of treasury bonds in the market suddenly increases, and investors' bids for each treasury bond will fall. For example, a Treasury with a face value of $100 may only sell for $90. This price drop can significantly change the yield of Treasuries. Continue with the example of a Treasury bond with a face value of $100, an annual interest rate of 3%, and a principal and interest payment of $103 due after one year: Normal situation: The investor pays $100 to buy, and at maturity receives $103, the yield is 3% ($3 interest ÷ $100 principal). After sell-off: If the market price falls to $90, the investor buys for $90 and still matures to receive $103, with a yield of $13 and the yield rises to 14.4% ($13 ÷ $90). As a result, the sell-off caused Treasury prices to fall and yields to rise. This phenomenon is known in financial markets as the "inverse relationship between bond prices and yields". The impact of rising U.S. Treasury yields on markets and the economy is multidimensional. First, it reflects a change in market confidence in U.S. Treasuries. Rising yields mean investors are demanding higher returns to offset the risks, perhaps because the sell-off is too large or concerns about the health of U.S. finances have intensified. More importantly, rising yields directly push up the cost of new government bonds. The U.S. government's debt management strategy is often referred to as "debt for" – financing by issuing new Treasuries to repay old Treasuries as they mature. If the market yield remains at 3%, new Treasuries could use a similar rate. But when market yields soar to 14.4%, new Treasuries must offer higher interest rates to attract investors, otherwise no one cares. For example, suppose the United States issues $100 billion in new Treasury bonds: At a yield of 3%, interest expense is $3 billion per year. At a yield of 14.4%, interest expense increases to $14.4 billion per year. This difference represents an increased fiscal burden on the United States, especially considering that the current size of US debt exceeds $33 trillion (as of 2023, it may be higher in 2025). A surge in interest payments will crowd out other budgets, such as infrastructure, health care or education. Fiscal Distress and the Risk of "Tearing Down the Eastern Wall to Make Up for the Western Wall" The U.S. government's debt cycle relies on low-cost financing. When yields rise, interest rates on new bonds climb, and fiscal pressures skyrocket. Historically, the United States has maintained debt sustainability by "tearing down the eastern wall to make up for the western wall" – borrowing new debt to pay off old debts. However, in an environment of high interest rates, the cost of this strategy has ballooned. Taking the Japanese sell-off as a trigger, assuming that market yields continue to be high, the United States may face the following dilemmas: Debt snowball effect: high interest rates lead to an increase in interest expense as a percentage of the fiscal budget. According to the Congressional Budget Office (CBO), interest payments could account for more than 20% of the federal budget by 2030 if interest rates continue to rise. This would limit the government's flexibility in stimulus or crisis response. Market confidence falters: Abnormal yield volatility in U.S. Treasuries, a global reserve asset, could raise concerns about U.S. credit ratings. While the U.S. has maintained its AAA rating to date, S&P downgraded its rating to AA+ in 2011. A massive sell-off could exacerbate similar risks. Monetary policy pressures: Higher U.S. Treasury yields could force the U.S. Federal Reserve to adjust monetary policy, such as raising the federal funds rate to curb inflation expectations. This will further drive up borrowing costs, affecting businesses and consumers. The Impact of the Global Economy To mitigate the crisis caused by the sell-off, the US and global financial systems need to adopt a multi-pronged response: US fiscal reform: Reduce reliance on debt financing and increase market confidence in US debt by optimizing taxes or cutting spending. International coordination: Major creditor countries (such as Japan and China) and the United States can negotiate bilateral negotiations to gradually reduce their holdings of U.S. bonds to avoid sharp market fluctuations. Fed intervention: In extreme cases, the Fed could buy U.S. bonds through quantitative easing (QE) to stabilize prices and yields, but this could exacerbate inflation risks. Diversified reserves: Global central banks can gradually diversify their foreign exchange reserves, reduce their dependence on U.S. bonds, and diversify the risk of a single asset. The impact of rising U.S. Treasury yields on markets and the economy is multidimensional. First, it reflects a change in market confidence in U.S. Treasuries. Rising yields mean investors are demanding higher returns to offset the risks, perhaps because the sell-off is too large or concerns about the health of U.S. finances have intensified. Conclusion US Treasury bonds are not only the government's "IOU", but also the cornerstone of the global financial system. The hypothetical scenario of Japan's $1.2 trillion U.S. bond sell-off reveals a delicate and complex balance in the Treasury market: the sell-off causes prices to fall and yields to rise, which in turn drives up U.S. fiscal costs and may even destabilize the global economy. This ripple effect reminds us that a single country's debt decision can have far-reaching global consequences. In the current context of high debt and high interest rates, countries need to carefully manage financial assets and jointly maintain market stability, so as to avoid the debt game of "tearing down the east wall to make up for the western wall" from turning into an uncontrollable fiscal dilemma. Related reports Trump tariffs make U.S. debt "risk aversion myth busted" lazy bag: Wall Street recognizes "risky assets", China and Japan are dumping murderers? 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