by Mariam Samuel and Gareth Minson
President Trump has often been cited claiming that he will negotiate America’s debt through a lower rate of repayment. These claims give rise to many conversations about United States debt, specifically who owns it. The two largest holders of United States debt are the U.S. followed by China.
If Trump went through with his claims, the biggest population affected would be U.S. entities who own more than half of U.S. debt. At a lower buy back rate, the United States would incur the most losses as a result of being repaid less of the owed bonds. Also a point of concern is the large weight which other countries have on our debt with foreign countries owning over $6 trillion of around $20 trillion dollars of United States debt.
The data table shows the most recent data for the top 5 countries (other than the United States) holding U.S. debt in December. Although this is only one month’s worth of data, a look at the past year’s data correlates these countries’ holdings. It is interesting to note that out of the top five, only 2 of these countries are in the top five of U.S. trade partners.
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Economist Brad W. Setser, recently published an article emphasizing the importance of close surveillance of this data. His observations, focused on China, have revealed that China’s formal reporting underestimates their true holdings and reserves data. He goes on to explain that China holds more than U .S. treasuries, giving even more reason to need for further investigation.
The American markets are accustomed to significant purchases by foreign governments. In fact, these purchases have become quite significant. Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas point out that foreign governments ownership of bonds grew 750% between 1994 and 2010. This figure has grown to $6.3+ trillion since 2010. The authors mentioned that the rapid rise in ownership of bonds had to do with emerging markets with large surpluses and America’s bonds being viewed as a safe place to store money. In their report back in 2012, the effects of the foreign investment slowing by $100 billion per month, it would be disastrous in both the short (40-60 points) and long run (20 points). While the Federal Reserve board’s numbers look bad, Christopher Martin, in a more updated study of the data, says that the numbers are only worse. The short run will see changes of 70-100 points and the long run will see a similar shift. To summarize, it is dangerous for the American bond market for emerging markets to see their growth slow because these countries will run smaller surpluses and will buy fewer bonds. As Rose and Katherine point out in their blog post, as the cost of bonds rises, the yield falls.