This week, there has been “big news” about U.S. debt, and the “decisive” moment before the end of the year has arrived!

Since the beginning of this year, the issuance of U.S. Treasury bonds has increased significantly. As of September, the total issuance of U.S. Treasury bonds for the whole year reached 15.7 trillion U.S. dollars, with a net issuance of 1.8 trillion U.S. dollars, an increase of 45% compared with 2022.

The scale of U.S. Treasury bond issuance hit a three-year high and was significantly higher than the pre-epidemic central level.

However, the Federal Reserve, the largest buyer of U.S. Treasuries, is gradually reducing its holdings.

The Federal Reserve began shrinking its balance sheet on June 1 last year, ending its ultra-loose monetary policy since the early days of the COVID-19 pandemic. As of October 12, the total size of the Federal Reserve's balance sheet has fallen from a peak of $8.955 trillion in April last year to $7.952 trillion, a decrease of more than $1 trillion. Among them, from the perspective of changes in the asset side, the main asset that has continued to decline is Treasury bonds.

Secondly, major overseas official investment institutions, China and Japan, are also selling U.S. Treasuries.

The report data shows that in August this year, China again reduced its holdings of U.S. Treasuries by US$16.4 billion, and its holdings have dropped to US$805.4 billion. This is the fifth consecutive month that China has reduced its holdings of U.S. Treasuries, and the size of its holdings of U.S. Treasuries has hit the lowest level in nearly 14 years.

Data shows that Japan increased its holdings of U.S. Treasuries by $3.7 billion in August, bringing its holdings to $1.11 trillion. Although Japan also increased its holdings of U.S. Treasuries by more than $10 billion in June and August, it reduced its holdings of U.S. Treasuries by more than $30 billion in May. The combined increase in holdings in recent months is not as much as the sell-off in May.

On the one hand, the issuance scale has skyrocketed, while on the other hand, official institutions have reduced their holdings. The imbalance between supply and demand is the key factor in the recent storm in the U.S. debt market.

Some saw it as a warning sign that markets would start charging higher penalties for U.S. fiscal profligacy, with the deficit doubling to about $2 trillion in the fiscal year ending in September.

In addition, Bank of America has raised its deficit forecast for the U.S. fiscal year in the coming years, predicting that the U.S. overspending will increase from $1.7 trillion in 2023 to $2 trillion by fiscal year 2026. The main factor driving this increase is the increase in interest payments on U.S. borrowing, forcing the Treasury to continue to issue more bonds.

JPMorgan Chase also expects an increase in Treasury issuance in the future, pointing out that the deficit in fiscal 2023 will be $100 billion higher than previously expected, and the Federal Reserve's quantitative easing policy will continue until 2024, creating a financing gap of $720 billion.

The major official investors of U.S. Treasuries are all reducing their holdings. Who is "taking over" these U.S. Treasuries?

Market insiders said that U.S. residents, hedge funds and overseas private investors may be the "buyers" of this round of U.S. debt market.

So the question is, can private investors and American residents afford such a huge national debt?

Mohamed El-Erian, chief economic adviser at Allianz, said the buyer question is not going away anytime soon and buyers should be hesitant given the supply of government debt.

He said that as global war conflicts intensify, the Treasury market has lost its economic, policy and technical "anchors" and the market may form biased benchmark prices.

He believes the market is shifting away from bonds and toward assets like Bitcoin as a “safe haven” store of value #BTC

The Fed has been shrinking its balance sheet since last year to remove money from the economy and help offset high inflation. With inflation yet to reach the Fed's 2% target, more sales are expected, pushing up bond yields. El-Elrian noted that high interest rates are bad for both businesses and governments and could lead to a recession by 2024.

U.S. Treasury confirms bond issuance plan

At 8:30 pm Beijing time on November 1, the U.S. Treasury will announce its bond issuance plan for the next three months.

In addition, the interest rate decision will be announced at 2 a.m. Beijing time on November 2, and Federal Reserve Chairman Powell will hold a press conference half an hour later.

The market generally believes that the Federal Reserve will maintain the interest rate unchanged at 5.5%.

If as the market expects, this will be the first time since the start of this round of rate hikes that there will be no rate hike for two consecutive months.

The Federal Reserve has been making big news at the beginning of this month. The "decisive" moment before the end of the year is coming. Let's pay attention together~