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US Debt ‘Out the Wazoo’ as China and Japan Sell Off Treasuries

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The US national debt increased by $1.27 trillion in fiscal 2018. If you expected the pace of borrowing to slow in fiscal 2019, you’ll be disappointed. In just the first 11 business days of the new fiscal year, the US government added another $138 billion of debt to the total. That brings the total national debt to a staggering $21.654 trillion — or as Wolf Street put it “debt out the wazoo.”

Meanwhile, the two biggest buyers of US Treasuries are in a selling mood.

In order to fund all of the government spending, the US Treasury Department has to sell bonds – lots of bonds. Earlier this year, the agency said it planned to auction off around $1.4 trillion in Treasuries in 2018 alone, and it expects that pace of borrowing to continue over the next several years.

The US Treasury Department isn’t the only one selling US Treasuries. So are the Chinese and Japanese, typically the biggest buyers of US debt.

According to the most recent Treasury Department data, China’s holdings of US Treasuries fell for the third consecutive month in August. The Chinese shed another $6 billion in US debt, dropping its total holdings to $1.165 trillion. Over the last year, China’s holdings of Treasury bonds fell by $37 billion year-on-year.

Meanwhile, the Japanese sold off $5.6 billion of Treasuries in August and shed $72 billion between August 2017 and August 2018. Japan now holds about $1.03 trillion in US debt. That’s down $210 billion from its 2014 peak.

Over the last decade, the US government could always count on the Federal Reserve to buy its paper if nobody else would. The central bank gobbled up billions of dollars in US debt through its quantitative easing program in the wake of the 2008 crash. But now the Fed is tightening. The Federal Reserve shed $152 billion through the end of August as part of its QE unwind. It now holds $2.294 trillion in US debt.

So, the three biggest buyers of US Treasuries aren’t buying. No wonder bond yields (i.e. interest rates) continue to go up. They have to in order to entice somebody to buy all of this debt. In fact, earlier this month, the 10-year US Treasury yield hit the highest level since 2011.

So, who’s buying?

Interestingly, the US government borrows from itself, as WolfStreet highlighted.

US government holdings (USG pension funds, Social Security, etc.) increased by $21 billion over the 12-month period, bringing the ‘debt held internally’ to $5.673 trillion, or 26.4% of the gross national debt.”

But primarily, US institutions and individuals are carrying the load. That means pension funds, hedge funds, banks, insurance companies, corporations and everyday Americans. They added $1.517 trillion to their holdings over the 12-month period.

As WolfStreet put it, it’s a dirty job, but someone has to do it.

The question is: how long will they do it?  And how high will interest rates need to go to keep them in the market?

As we’ve said repeatedly, rising interest rates in an economy built on debt aren’t good news. This is why we’ve seen so much instability in the stock market recently as bond yields have crept up. Peter Schiff said it’s pretty obvious a recession is coming and rising interest rates could serve as the pin that pricks the stock market bubble.

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