The U.S. Debt Bomb

The United States is currently burdened with a record national debt of 36.22 trillion dollars. This figure is staggering not just for its size but for its timing. It is growing in an environment of historically high interest rates and global geopolitical instability. For decades, U.S. Treasuries have been regarded as the safest asset in the world. But when debt levels reach these heights, even the safest assets can carry serious risks. The issue is no longer theoretical. It is a present reality for policymakers, investors, and markets worldwide.

Who Owns U.S. Debt?

According to the latest data from the U.S. Treasury, the debt is held by both domestic and international investors.

Domestic holders account for approximately 26.4 trillion dollars, or around 73 percent of the total debt:

• Intragovernmental debt: 7.0 trillion dollars (20 percent)
  This includes money the government owes to itself, such as the Social Security Trust Fund and various federal agencies.

• U.S. holders of savings bonds: 5.7 trillion dollars (17 percent)
  These are individual American investors and households that own Treasury securities directly.

• Federal Reserve: 5.2 trillion dollars (15 percent)
  The central bank holds Treasuries to conduct monetary policy.

• Mutual funds: 3.7 trillion dollars (11 percent)
  These represent investment funds managing assets on behalf of retail clients.

• State and local governments: 1.7 trillion dollars (5 percent)

• Depository institutions: 1.6 trillion dollars (5 percent)

• Pension funds: 1.0 trillion dollars (3 percent)

• Insurance companies: 480 billion dollars (1 percent)

International holders account for around 9.82 trillion dollars, which is 27 percent of the total:

• Other countries: 5.3 trillion dollars (15 percent)

• Japan: 1.1 trillion dollars (3 percent)

• China: 820 billion dollars (2 percent)

• United Kingdom: 680 billion dollars (2 percent)

Foreign governments hold U.S. debt primarily as part of their foreign exchange reserves. U.S. Treasuries are considered liquid, stable, and denominated in dollars. However, this also creates a vulnerability if international confidence in the U.S. fiscal position deteriorates.

Why the U.S. Debt Matters More in a High Interest Rate Environment

Debt is far easier to manage when interest rates are low. For many years, the U.S. government borrowed extensively with minimal interest cost. That changed in 2022 when the Federal Reserve began tightening monetary policy to fight inflation. As a result, the cost of servicing the debt has risen dramatically.

The United States is now paying over one trillion dollars per year just in interest. This is more than it spends annually on national defense. Unlike other government spending, interest payments cannot be delayed or avoided. These payments now take a growing share of federal revenue and reduce the resources available for new investments in infrastructure, healthcare, or innovation.

This has become a long-term structural challenge. It limits the ability of the government to respond to new economic shocks, and it could ultimately raise doubts about the long-term credit quality of U.S. debt.

What Happens If Major Debt Holders Sell?

If large holders of U.S. debt decided to reduce or liquidate their positions, the impact on financial markets could be significant. While domestic entities such as pension funds and households are unlikely to sell quickly, foreign governments might have strategic or political motivations.

If countries like China or Japan were to significantly reduce their holdings, several outcomes could follow:

• An excess supply of Treasuries could drive yields higher

• Bond prices would fall, resulting in losses for existing holders

• The U.S. dollar could weaken, potentially increasing domestic inflation

• Global confidence in the stability of the U.S. financial system might erode

That said, foreign governments are also aware of these risks. A rapid liquidation of Treasuries would harm their own financial systems and reserves. More often, they reduce exposure gradually or use it as leverage in geopolitical negotiations.

How Could the U.S. Reduce Its Debt?

There are three main strategies that can be used to manage or reduce the national debt:

Cutting spending
Spending reductions are politically sensitive. Programs like Social Security, Medicare, and defense take up the largest portions of the federal budget and are difficult to reform or reduce.

Raising taxes
Increasing tax revenue can help balance the budget, but it can also reduce economic growth if done without careful planning. It may discourage business investment and reduce consumer spending.

Growing the economy faster than debt increases
This is the most favorable path forward. If GDP grows at a higher rate than debt, the debt-to-GDP ratio can decline. This requires long-term investment in productivity, education, and infrastructure.

Some propose allowing inflation to rise above interest rates for a period, which would erode the real value of the debt. While this approach may be tempting, it comes at the cost of reduced purchasing power and a loss of public confidence in the currency.

Investment Risks and Opportunities

The rising U.S. debt and the high cost of servicing it present several investment challenges:

• Volatility in bond markets: With more debt being issued and yields remaining elevated, fixed income markets may become less stable. This could create uncertainty across all asset classes.

• Currency pressure: If foreign demand for Treasuries weakens, the U.S. dollar could depreciate against other major currencies.

• Inflation risk: Governments under pressure to reduce debt may be more willing to tolerate inflation, which undermines the real value of savings and fixed-income investments.

• Reduced private investment: As more capital is directed toward funding government debt, less may be available for innovation and private sector growth.

Despite these risks, there are also opportunities:

• Commodities and hard assets: Gold, oil, and industrial metals often perform well during periods of fiscal stress or currency devaluation.

• Global diversification: Investors can consider increasing exposure to regions with lower debt burdens and stronger growth potential.

• Active bond strategies: In this environment, passive bond investing is unlikely to deliver consistent returns. Active strategies that manage duration, credit quality, and inflation risk will likely outperform.
  
  

Final Thoughts

The U.S. national debt has reached unprecedented levels. While much of it is held by domestic investors, a substantial portion remains in foreign hands. High interest rates have turned the cost of carrying this debt into a major economic and political issue. The longer it grows unchecked, the more constrained future policy choices become.

For investors, this environment demands careful analysis and prudent positioning. The market will continue to rely on the safety and liquidity of U.S. Treasuries, but the assumption of absolute stability should be questioned. Understanding where the real risks lie and adapting portfolio strategies accordingly will be essential for preserving capital and seizing opportunity.

Do not consider this article as financial advice. We only showcase our own opinion. Always do your own due diligence before investing in any alternative investment opportunities.