Why the US government debt market is no longer attractive to investors. How it works

The main thing in the material:

— The global market has stopped automatically financing American debt — demand has shifted from central banks to yield-sensitive investors

— Foreign investments in US Treasuries reached $9.5 trillion, but the share of official holders fell below half, weakening the stability of demand

— Japan, China and the oil countries are no longer building up their positions, turning from anchor investors into neutral or situational players

— Gold strengthens the role of an alternative reserve — its value in the reserves of the Central Bank already exceeds Treasuries, signaling diversification

— The system is not collapsing, but it is becoming more expensive: with the growth of US debt, the market requires higher yields, and volatility increases

The war in Iran has disrupted the mechanism that has supported American debt for decades. The flow of petrodollars into US government bonds (US Treasuries) began to weaken amid falling energy exports from the Persian Gulf countries. The quality of demand for Treasuries has deteriorated — the market has become more dependent not on strategic holders, but on yield-sensitive buyers. This does not mean that Treasury bonds have ceased to form the basis of the global financial architecture, but it indicates a regime change. Izvestia investigated why this trend is important not only for the United States, but also for Russia.

The market has lost its footing

According to the TIC system of the US Treasury, total foreign investments in US Treasury securities as of February amounted to about $9.5 trillion, which is a historical maximum. Of the total, foreign official holders (central banks) control about $4 trillion in Treasuries, or less than half.

This situation is reflected in the overall ownership structure of Treasury bonds. The total volume of US market debt is about $31 trillion, of which $4 trillion is held by foreign central banks, and another $4.4 trillion by the Federal Reserve. The rest is held by private capital. This is about 70% of the total market. The private sector is heterogeneous: for example, pension funds remain non-price-sensitive holders, but the role of monetary funds, banks and other market investors is growing in the ownership structure, whose strategy directly depends on the rates and financing conditions. This leads to an increase in paper yields and an increase in volatility. In other words, the market has become more nervous, because government bonds are increasingly being held not only in government reserves, but also by players who need Treasuries only at the right price. And this is especially important because the previous stabilizing layer of demand has not disappeared. Central banks are still major holders. The question is how exactly they behave in the current environment.

Almost 90% of the portfolio of foreign official holders is made up of long—term bonds and notes, while the share of short-term securities is slightly above 10%. This means that reserve investors are still concentrated at the long end of the curve. However, the dynamics show the absence of an accelerated increase in this position: the volume of long securities is growing much slower than the general market, which indicates the loss of the role of the main source of demand.

Behind all these figures are the holders of capital — the oil states of the Persian Gulf, Japan, China and the European financial bloc — whose behavior is now changing the market regime. Previously, they acted as a relatively stable and non-price-sensitive source of demand, but today each of them weakens this function for its own reasons: through currency interventions, diversification of reserves or the growing role of hedging.

Geography of the American national debt

Among the foreign owners, the largest holders are Japan, Great Britain and China.

Japan holds its position at about $1.2 trillion without a significant increase. Tokyo traditionally considers US Treasury securities as a liquid reserve, including for currency interventions. However, in recent years, a new factor has been added to this: rising yields on Japanese government bonds. After the Bank of Japan abandoned its ultra-lenient policy, the yield on 10—year JGBs rose to about 2.4%, the highest levels in recent decades.

Under these conditions, there is less need to hold significant positions in Treasuries: the difference in yields between American and Japanese securities is decreasing, and taking into account currency hedging, in some cases it practically disappears. This means that Japan is no longer an unconditional source of external demand and is increasingly being viewed by the market as a potential channel for capital redistribution.

China, according to the same TIC, holds $693 billion in treasury bonds, while there is a trend towards a systemic decline in volume (from a record $1.3 trillion in 2013). China uses reserves to stabilize the yuan exchange rate and manage liquidity, while gradually diversifying their structure to reduce risks.

However, official statistics do not provide a complete picture. The TIC data is largely based on information from custodians — banks and brokers — and reflects the location of the securities rather than the final owner. That is why some of the Chinese investments may pass through other jurisdictions — Belgium and Luxembourg. According to experts, if you look at the dynamics of treasury bond holdings, you can see that over the same period when China's assets decreased by $600 billion, Belgium's assets increased by $500 billion.

However, even with this factor in mind, China does not demonstrate an increase in its position and does not act as a source of a new influx of demand — this is what matters for the market.

Additional pressure on the market has increased against the background of the worsening situation in the Middle East. As Bloomberg notes, in the five weeks following the escalation in late February, foreign official holders acted as net sellers of Treasury bonds, and the volume of assets held at the Federal Reserve Bank of New York decreased by about $82 billion to $2.7 trillion, the lowest level since 2012.

With rising oil prices, importing countries are forced to support national currencies using dollar liquidity, while suppliers from the Persian Gulf are faced with a decrease in export flows and a reduction in excess revenues that were previously directed to American assets.

Sources say that the UAE is in talks with the United States about financial support that Abu Dhabi may need if the war with Iran drags on. The Emirates has allegedly already threatened Washington that if the country runs out of dollars, it will use yuan or other currencies when selling oil and other transactions. The war in Iran has generally revived the concept of oil yuan, which the Chinese authorities promoted back in 2022. After Tehran took control of the Strait of Hormuz and began accepting fees for the safe passage of ships in yuan, demand for Chinese currency increased. The mechanism of petrodollar redistribution, which has supported demand for Treasury bonds for decades, is noticeably weakening.

To this is added Europe, where investors have increasingly begun to hedge currency risk — that is, to insure the dollar exchange rate through derivatives, without selling the bonds themselves. This means that capital formally remains in Treasuries, Europe does not exit the system — it is deeply tied to dollar liquidity and dollar safe assets, but does not automatically support it: profitability, hedge value and market conditions are increasingly important for investors.

The key shift

If we add up the behavior of the key holders — Japan, China, the Persian Gulf countries and European financial centers — it becomes obvious that the problem is not in one player. The most honest way to describe what is happening is not "de—dollarization", but a slow redistribution in portfolios with the growing role of gold. In January, we wrote that for the first time since the mid-1990s, the total market value of US Treasuries held by the world's central banks has become less than the total market value of gold in their reserves ($3.7 versus $5.2 trillion). This means that the new influx of reserves is increasingly being allocated not to American debt, but to a more politically neutral asset.

At the same time, focusing on country risks — for example, the behavior of China or oil states — is in itself a simplification. The key shift is taking place not so much at the country level as at the investor type level: the Treasuries market is increasingly dependent not on reserve holders, but on participants who are sensitive to profitability, hedging costs, and financing conditions. It is the change in the "quality of holders", and not just the geography of capital, that determines the new dynamics of the market.

In sum, this means one thing: the previous demand for US Treasuries, although it does not show a collapse, has stopped growing and has lost the function of an automatic stabilizer. Demand is becoming less unconditional, less politically neutral, and more sensitive to price, hedge, and stress. This is a real systemic change.

Nevertheless, the Treasuries market, with its scale, depth, and lack of alternatives, remains one of the foundations of the global financial system. But sustainability is now achieved at the expense of price: with growing US debt, the market requires higher and higher yields to absorb this debt. This is the new reality — not the collapse, but the gradual rise in price and nervousness of the entire structure.

At the same time, financial chains in global trade are changing. The weakening of the petrodollar system is accompanied by an increase in alternative payments, including in yuan. This does not mean a rapid change of the leading currency, but indicates a gradual fragmentation of the system, in which the dollar is no longer the only absolute center.

It's not an abstract drama for Russia.

For Russia, the consequences are quite practical. The economy now lives in a semi-isolated loop, where the external shock first passes through export earnings, the budget and internal monetary conditions. Therefore, stress in the dollar system by itself does not mean either an automatic fall or a strengthening of the ruble. The key factor is the dynamics of raw materials, primarily oil, gold and the stability of the currency flow. If the tension in the dollar system coincides with high oil and gold prices, the economy receives partial compensation. If it is accompanied by a global flight from risk and a drop in raw materials, the pressure on the ruble and the budget increases.

At the same time, an increase in Treasury yields means an increase in the cost of capital worldwide, and this reaches Russia through rates, liquidity and risk perception. As a result, credit is becoming more expensive and less accessible: banks are acting more cautiously, and the most vulnerable segments — the development and consumer sectors — are under pressure.

Under these conditions, the OFZ market is not completely isolated, but it also does not move directly behind the dollar. If external stress does not destroy the export flow, it is able to maintain relative stability. But with falling raw materials and declining budget revenues, the long end of the curve also requires an additional premium. In other words, the fate of OFZ is determined not by the "end of the dollar," but by the channel through which global nervousness enters the economy.