The holders of U.S. debt have shifted drastically over the past decade, tilting more toward profit-driven private investors and away from foreign governments that are less sensitive to prices.<\/p>\n
That threatens to turn the U.S. financial system more fragile in times of market stress, according to Geng Ngarmboonanant, a managing director at JPMorgan and former deputy chief of staff to Treasury Secretary Janet Yellen.<\/p>\n
Foreign governments accounted for more than 40% of Treasury holdings in the early 2010s, up from just over 10% in the mid-1990s, he wrote in a New York Times op-ed<\/a> on Friday. This reliable bloc of investors allowed the U.S. to borrow vast sums at artificially low rates.<\/p>\n \u201cThose easy times are over,\u201d he warned. \u201cForeign governments now make up less than 15% of the overall Treasury market.\u201d<\/p>\n While they didn\u2019t dump Treasuries and still hold roughly the same amount as 15 years ago, foreign governments didn\u2019t ratchet up their buying in line with the recent surge in U.S. debt, which now tops $38 trillion.<\/p>\n Private investors have stepped in to absorb the massive supply of Treasury bonds, but they are also more likely to demand higher returns, making rates more volatile, Ngarmboonanant pointed out.<\/p>\n The influence of hedge funds, which doubled their presence in the Treasury market in the last four years, raises particular concern among U.S. officials, he added. In fact, the biggest share of U.S. debt that\u2019s held outside the country is\u00a0now in the Cayman Islands, where many hedge funds are officially based.<\/p>\n Ngarmboonanant attributed \u201cunusual turbulence\u201d during recent shocks in the Treasury market, which has historically been a safe haven during crises, to hedge fund activity. That includes the sudden selloff in the immediate aftermath of President Donald Trump\u2019s shocking \u201cLiberation Day\u201d tariffs.<\/p>\n Relying on AI-fueled productivity gains, stablecoins, Fed rate cuts or inflation to sustain U.S. debt will eventually backfire, he said.<\/p>\n \u201cFinancial engineering and false hopes won\u2019t keep America\u2019s lenders happy,\u201d Ngarmboonanant predicted. \u201cOnly a credible plan to restrain deficits and control our debt will ultimately do that.\u201d<\/p>\n The ability of bond investors to force lawmakers to change course has earned them the \u201cbond vigilantes\u201d moniker, which was\u00a0coined by Wall Street veteran Ed Yardeni<\/a>\u00a0in the 1980s.<\/p>\n Indeed, upheaval in the bond market<\/a> after Trump unveiled his global tariffs in April helped convince him to retreat from his most aggressive rates. That prompted economist Nouriel Roubini to say, \u201cthe most powerful people in the world are the bond vigilantes<\/a>.\u201d<\/p>\n But analysts at\u00a0Piper Sandler<\/a>\u00a0recently dismissed the power that bond vigilantes actually have over politicians.<\/p>\n In an August note, they pointed out that the bond market didn\u2019t prevent federal deficits from exploding and haven\u2019t steered Trump away from continuing to press his overall tariff agenda.<\/p>\n Still, the U.S. debt outlook has become so dire that even longtime Republican Mitt Romney, a former senator and presidential candidate, has called for increasing taxes on the rich<\/a> as the Social Security Trust Fund races toward insolvency in 2034.<\/p>\n \u201cToday, all of us, including our grandmas, truly are headed for a cliff,\u201d he warned in a\u00a0recent New York Times<\/a> op-ed. \u201cTypically, Democrats insist on higher taxes, and Republicans insist on lower spending. But given the magnitude of our national debt as well as the proximity of the cliff, both are necessary.\u201d\u200b<\/p>\n