NEW YORK -- As the U.S. government binges on borrowing to finance big spending under President Donald Trump, it has had no problem selling debt to investors searching for returns, notably to those in Asia who together hold $258.3 billion in Treasurys.
Last year's U.S. budget deficit topped $1 trillion, with the total reaching $19 trillion. U.S. Treasurys now account for 80% of all sovereign debt in the developed world, and the federal government's annual net interest payments exceed $390 billion, five times the figure for Japan's debt-ridden government.
U.S. Treasurys offering returns of over 1% are attractive to investors at a time when some government debt yields zero or even negative returns. But heavy exposure comes with a risk for investors. If inflation picks up pace in the U.S., it could spur a sell-off of both the dollar and Treasurys, leaving them with massive losses.
So far the binge on U.S. government bonds has persisted despite a buoyant stock market.
As tensions heightened between the U.S. and Iran at the start of the year, investors stepped up purchases of U.S. government bonds, pushing down yields on 10-year Treasurys to 1.8%, 0.1 of a percentage point less than at the end of last year.
Demand for Treasurys will remain strong for the time being, says Mona Mahajan, the U.S. investment strategist at Allianz Global Investors.
Government bond yields in other major industrial nations, including Japan, Germany and France, are stuck a little above or in negative territory. But save-heaven Treasurys are offering yields above 1%.
The amount of U.S. Treasurys held by foreign investors grew by $469.2 billion during the first 11 months of 2019, an expansion about eight times that of 2018, according to the Treasury Department.
Japan was the biggest net purchaser, with a $121.1 billion increase in its holdings due to aggressive buying by life insurers and banks. Many countries in Europe and the rest of Asia boosted their U.S. bond holdings by several dozen billion dollars. Investors in other regions, including the Middle East, Latin America and Africa, also flooded into Treasurys.
China, which was the top buyer in the 2000s, slashed its holdings as its current-account surplus began to shrink due to its trade spat with the U.S. Beijing has also diversified its investments to other assets, such as gold. But the fall in Chinese holdings was more than offset by other nations' net purchases.
The Trump government's deficit-financing is ensuring an ample supply of Treasury bills. In 2019, the U.S. ran a budget deficit of $1.2 trillion, up 50% from before Trump came into office in 2017, according to the International Monetary Fund.
Growing health care and other expenditure as well as Trump's hefty tax cuts contributed to the increase.
The annual U.S. budget deficit reached $1.9 trillion in 2009, after the global financial crisis, but has since fallen, though the U.S. government still issues more than $1 trillion-worth of bonds a year to sustain its spending.
Budget deficits in Japan and Europe have also shrunk during the past decade, causing declines in government bond issues. Central banks have been power-buying the instruments to pump up domestic money supplies, contributing to the decrease in supply. The Bank of Japan, for example, now holds 40% of all outstanding Japanese government bonds.
The Trump administration's aggressive spending to please voters is in sync with investor appetite for its government bonds. But the U.S.'s fiscal health is deteriorating. The nation's outstanding debt stood at close to $19 trillion at the end of September, roughly equal to its gross domestic product, and is on track to surpass $20 trillion this year.
Net interest payments on the debt will reach $460 billion this year, nearly double the figure of four years ago, according to the Congressional Budget Office. Annual debt service costs will grow to $724 billion in 2025, bigger than the defense budget of $706 billion.
While Treasurys generate a good income for investors, growing U.S. debt should be a source of concern for American policymakers. The federal government's fiscal situation is unsustainable, said professor William M. VanDenburgh at College of Charleston.
Former President Bill Clinton, a Democrat, managed to balance the federal budget in the 1990s, but his Republican successor, George W. Bush, used Clinton's surpluses as rationale for a big tax cut and started wars in Afghanistan and Iraq.
Consequently, the U.S. government became dependent on massive Treasury purchases by China and oil-producing nations.
In 2005, Ben Bernanke, then a Federal Reserve governor and future Fed chairman, said "a global saving glut" -- he was alluding to the huge savings in countries like China -- was tamping down U.S. interest rates.
The U.S. now borrows from many other countries with high savings. Global interest rates are expected to remain low for years to come, propping up demand for U.S. government bonds.
If, however, the confrontation between Washington and Tehran escalates further, the health of U.S. finances could deteriorate fast.
A bloated and swelling U.S. budget deficit could drag down Treasury prices, leaving many international investors with heavy losses on their holdings.
If the mutually dependent relationship between the U.S. government and international investors collapses, it could have dire consequences for the world economy.