Record U.S. Debt Ceiling Hike Triggers Bond Sell-Off by Taiwan Investors

The United States has just enacted the largest debt ceiling increase in its history—a fiscal move that has caught the attention of global investors. Among the first to react are institutional investors in Taiwan, who have begun selling off U.S. Treasury bonds at the fastest pace since the early months of the COVID-19 pandemic. Financial analysts report that the rapid offloading of bonds by Taiwanese entities is a direct response to growing concerns about the sustainability of American debt and long-term fiscal policy.

This shift is especially significant because Taiwan has historically been one of the more stable holders of U.S. government debt. However, as the American national debt approaches unprecedented levels, concerns over inflation, rising interest rates, and the weakening strength of the dollar are prompting even longtime allies to reconsider their exposure. While U.S. officials argue that raising the ceiling was necessary to prevent default and preserve economic stability, international markets are reading it differently—some seeing it as a signal of deepening fiscal vulnerability.

The bond sell-off could ripple through global markets, possibly increasing yields on U.S. debt and applying new pressure on the Federal Reserve's monetary policy decisions. It may also reflect a broader rebalancing of international reserves, as nations like Taiwan look to diversify away from the dollar to shield themselves from potential volatility.

Taiwan's bond sell-off and U.S. debt pressure could impact domestic inflation:
When major foreign holders like Taiwan reduce their holdings of U.S. bonds, it can lead to higher interest rates as the Treasury has to offer more attractive yields to find buyers. These higher borrowing costs may filter into everything from mortgages to business loans, slowing growth but also adding inflationary pressure in the short term. At the same time, less foreign demand for dollars weakens the currency, making imports more expensive and driving up consumer prices—especially for energy, electronics, and food.

On the global de-dollarization front, Taiwan’s action reflects a cautious trend already seen in nations like China, Russia, and even some Gulf states. These nations are gradually shifting reserves to gold, the euro, the Chinese yuan, and even digital assets. It’s not a wholesale abandonment of the dollar—yet—but it signals growing unease with Washington’s debt trajectory and weaponization of the dollar through sanctions. If this continues, it could gradually reduce America’s ability to finance deficits cheaply and shake the global financial order built on U.S. Treasury dominance.

Global Sell-Offs of U.S. Treasuries (2023–2025) and the Drive Toward De-Dollarization

Foreign Holders Reduce U.S. Treasury Exposure: From 2023 through 2025, many foreign investors – both official reserve managers and private institutions – accelerated sales or refrained from new purchases of U.S. Treasury bonds. This trend has been pronounced in Asia and the Gulf. Taiwan, for example, saw a period of heavy selling in 2022, when its Treasury holdings dipped to around $215 billion by late 2022 (from ~$247 billion in early 2022)ticdata.treasury.gov. Although Taiwan’s holdings rebounded through 2023–2024 (rising to about $298.8 billion by April 2025)ticdata.treasury.gov, the island’s central bank has grown more vocal about the risks of its outsized exposure. Over 80% of Taiwan’s $593 billion foreign exchange reserves are in U.S. Treasuriesreuters.com – a concentration Governor Yang Chin-long warned could be “unfavourable” given the rapid rise in U.S. debt and political uncertaintyreuters.comreuters.com. This marks a cautious shift: Taiwan’s central bank still calls Treasuries “sound”reuters.com, but it has signaled that eroding trust in U.S. fiscal discipline may compel diversification. At the same time, Taiwanese private investors have been “unloading their holdings in US-focused bond funds at the quickest pace since the pandemic,” reflecting a broader “Sell America” momentumnews.bloomberglaw.com. In the first half of 2025 alone, Taiwan’s U.S. bond ETFs saw $3.3 billion in outflows, the largest six-month withdrawal since 2020news.bloomberglaw.com, as investors reacted to Treasury market volatility and currency risk (a strengthening Taiwan dollar)news.bloomberglaw.com.

Between 2023 and 2025, a clear pivot emerged among global investors, particularly in Asia and the Gulf, as they began reassessing their exposure to U.S. Treasuries amid mounting fiscal and geopolitical uncertainty. Taiwan stood out during this period: after trimming its U.S. bond holdings in 2022, its central bank cautiously rebuilt its position to $298.8 billion by April 2025. However, concerns over the concentration of its $593 billion in foreign exchange reserves—more than 80% of which are tied to U.S. debt—prompted Governor Yang Chin-long to publicly question the long-term prudence of such a strategy. While he maintained that Treasuries remained “sound,” he acknowledged that America's rising debt load and political volatility made diversification increasingly appealing. Echoing this sentiment, Taiwan’s private sector followed suit with remarkable urgency, dumping U.S. bond funds at a pace not seen since the early COVID-era selloff. In just the first six months of 2025, Taiwanese investors pulled $3.3 billion from U.S.-focused bond ETFs, driven by market instability and a strengthening Taiwan dollar, which made U.S. assets relatively less attractive. This trend points to a growing skepticism—not of U.S. solvency per se, but of overreliance on a financial system many now perceive as increasingly vulnerable to internal and external shocks.

China’s Steady Divestment: China, historically one of the largest foreign creditors to the U.S., has persistently cut its Treasury holdings as part of a deliberate reserve realignment. In 2022, amid geopolitical strains, China slashed its U.S. debt stake by a massive $173 billionglobaltimes.cn. This brought its holdings below the $1 trillion mark for the first time in over a decadeglobaltimes.cn. The drawdown continued at a more moderate pace thereafter: China offloaded about $50–57 billion of Treasuries in each of 2023 and 2024globaltimes.cn. By April 2025, China’s holdings had fallen to $757 billion – the lowest level since 2009globaltimes.cn and down roughly 40–45% from their 2013 peak of ~$1.3 trillioncryptorank.io. Notably, China has even been eclipsed by the UK as the second-largest foreign holderglobaltimes.cnglobaltimes.cn. Beijing’s reductions align with its broader strategy of foreign reserve diversification: Chinese officials have increased allocations to gold and non-dollar assets to reduce over-reliance on U.S. debtglobaltimes.cnglobaltimes.cn. “China has been gradually reducing its dollar assets, mitigating risks from over-concentration,” explains Xi Junyang of the Shanghai University of Finance and Economicsglobaltimes.cn. Indeed, the People’s Bank of China has rotated some reserves into commodities like gold – adding over 27 tons in Q1 2023 alonegfmag.com – and into alternative currencies as insulation against potential U.S. financial sanctionsgfmag.comgfmag.com. Talk of weaponization of China’s Treasury holdings (for instance, as leverage in U.S. trade disputes or over Taiwan) remains largely speculativegfmag.com. Analysts note China’s drawdown so far appears measured rather than a panic dumpgfmag.com, consistent with a “gradual reserve realignment” rather than hostile selling. Nonetheless, the implications are geopolitical: reduced Chinese demand for Treasuries coincides with Beijing’s push to promote the renminbi in trade (e.g. within an expanded BRICS bloc) and its stated unease with dollar-centric financegfmag.com.

China’s long-term divestment from U.S. Treasuries reveals a strategic recalibration rather than an impulsive retreat, signaling both economic foresight and subtle geopolitical messaging. Since 2022, Beijing has steadily trimmed its holdings—initially cutting $173 billion in one year—bringing its stake below the symbolic $1 trillion threshold for the first time in over a decade. This trend continued at a moderate pace through 2023 and 2024, culminating in an April 2025 balance of $757 billion, a nearly 45% reduction from its 2013 peak. More than just a financial move, this shift reflects Beijing’s pursuit of reserve diversification amid rising tensions with the U.S., particularly over Taiwan, trade, and technology access. By rotating into gold—adding more than 27 tons in just one quarter of 2023—and expanding exposure to non-dollar assets, the People’s Bank of China is preparing for a world in which reliance on U.S. debt may be more of a liability than a safeguard. While there’s no evidence of “weaponized dumping,” the political undertones are clear: as China’s appetite for Treasuries shrinks, so does its entanglement in a dollar-dominated global financial system. With the renminbi being quietly pushed through BRICS mechanisms and bilateral trade pacts, China’s divestment becomes part of a broader campaign to reduce dollar hegemony—carefully, methodically, and on Beijing’s terms.

Japan and Other Major Holders: Japan, still the top foreign creditor of the U.S., has also trimmed its Treasury portfolio from earlier highs. Japanese holdings peaked around $1.3 trillion in 2021ticdata.treasury.gov. By early 2023 they had sunk to roughly $1.1 trillionticdata.treasury.gov, in part due to the Bank of Japan’s currency interventions (selling U.S. assets to support a weakened yen) and a preference to invest more in higher-yielding domestic bonds. Although Japan’s Treasury stake stabilized around $1.08–1.13 trillion through 2024–2025globaltimes.cnarabnews.com, it remains below prior levels. Market watchers caution that if Japanese interest rates rise (the BoJ has started hinting at policy normalization), Japanese investors may repatriate funds from U.S. bonds back to JGBs, putting further pressure on Treasuriestroweprice.com. Other foreign holders show a similar retrenchment. Gulf states, for example, have quietly pared back their U.S. debt exposure. Saudi Arabia, which had built its Treasury holdings up to around $180 billion in early 2020ticdata.treasury.gov, has reduced that stockpile by roughly 40% amid the pandemic and its aftermatheconomymiddleeast.com. Saudi holdings stood at $126.9 billion in January 2025arabnews.com, down from the ~$180 billion range of a few years prior. In fact, between February 2020 and September 2023, Saudi holdings fell so much that U.S. Treasuries went from ~12% to just 7% of the GCC countries’ total foreign assetszawya.com. This reflects Gulf nations using more of their petrodollar windfalls for domestic investment, sovereign wealth funds, and non-U.S. assets, rather than recycling them into U.S. debt. (Notably, Saudi Arabia remains the only Gulf Cooperation Council member in the top 20 holders of Treasuriesarabnews.comarabnews.com.) Figure 1 illustrates the trajectory of several major foreign holders’ Treasury investments over recent years – China’s and Saudi Arabia’s sharp downtrend vs. Japan’s and Taiwan’s more mixed patterns.

Japan’s and other major foreign holders’ shifting stance on U.S. Treasuries reflects a broader recalibration of global capital flows amid rising fiscal concerns and evolving monetary policies. While Japan remains the largest foreign creditor to the U.S., its holdings have declined from a 2021 peak of roughly $1.3 trillion to a range between $1.08 and $1.13 trillion through 2024–2025. The Bank of Japan’s currency defense measures—offloading Treasuries to prop up the yen—combined with the growing appeal of Japanese government bonds (JGBs) as domestic rates inch upward, suggest a slow pivot toward inward reinvestment. Market analysts warn that any sustained rate hikes from the BoJ could trigger more large-scale repatriation of capital, reducing Japan’s role as a backstop for U.S. debt markets. Meanwhile, Gulf nations like Saudi Arabia have taken a more decisive turn. From a high of nearly $180 billion in early 2020, Saudi Treasury holdings dropped to $126.9 billion by early 2025—part of a broader trend where GCC states now allocate just 7% of their total foreign reserves to U.S. Treasuries, down from 12% three years prior. This divestment, driven by pandemic-era fiscal shifts and a focus on sovereign wealth diversification, signals a redirection of petrodollar surpluses into domestic infrastructure, technology, and alternative international partnerships. Collectively, the movements by Japan, Saudi Arabia, and others underscore a growing global hesitancy to maintain deep exposure to U.S. debt—especially as concerns about fiscal stability, dollar dominance, and interest rate volatility mount.

Figure 1: Major foreign holders of U.S. Treasuries (in USD billions), January 2021–January 2025. Japan and China – the two largest holders – have reduced their positions since 2021troweprice.comglobaltimes.cn. China’s holdings (orange line) hit a 14-year low by 2025globaltimes.cn. Taiwan (red) cut back in 2021–2022 but later increased holdings into 2025ticdata.treasury.gov, while Saudi Arabia (pink) slashed its exposure ~40% from 2020 levelseconomymiddleeast.com. (Data source: U.S. Treasury TIC reports.)

De-Dollarization and Reserve Diversification

Reserves Shift Away from the Dollar: The reduction in foreign Treasury buying is closely tied to global “de-dollarization” efforts. Many countries are rebalancing their foreign exchange reserves away from the U.S. dollar – motivated by both geopolitical considerations and financial prudence. IMF data confirm a gradual but persistent decline in the dollar’s dominance in central bank reserves. The greenback’s share of global FX reserves has fallen to about 58% (nominally) – its lowest in a quarter-centuryreuters.com. In fact, once valuation effects are accounted for (i.e. the dollar’s rise boosting the reported dollar value of other holdings), the dollar’s true share may be closer to 54% – a record lowreuters.com. Two decades ago, the dollar comprised over 70% of worldwide reservesreuters.com; today that figure is markedly lower as central bankers “chip away at their dollar holdings”reuters.com in favor of diversification. Importantly, this shift has not been a simple move from dollars to euros – “It’s not just diversification out of the dollar… Euro holdings have fallen as well,” notes Goldman Sachs analyst Michael Cahillreuters.com. Instead, reserve managers have increased allocations to a “basket of nontraditional reserve currencies” – such as the Chinese renminbi, Japanese yen, Korean won, Australian and Canadian dollars – as well as to goldreuters.comreuters.com. The share of these smaller currencies in global reserves hit ~12–13% by 2023 (up from barely 2–3% before 2009)reuters.com. This multipolar reserve strategy is designed to spread risk and reduce vulnerability to any single country’s policies.

The global pivot away from the U.S. dollar in foreign exchange reserves marks a profound transformation in the architecture of international finance, driven by both strategic recalibration and geopolitical disillusionment. According to the IMF, the dollar’s share of global reserves has slid to roughly 58%—its lowest in over 25 years—and when adjusted for valuation effects from a strong dollar, that share may be closer to 54%. This erosion reflects a steady, if cautious, movement by central banks to reduce their exposure to U.S. monetary and fiscal policy risks, especially in light of rising debt levels, political polarization, and the weaponization of financial tools like sanctions. Notably, this isn’t merely a shift toward the euro or other traditional alternatives; euro-denominated reserves have also shrunk. Instead, reserve managers are embracing a mosaic of smaller, nontraditional currencies—including the Chinese renminbi, Canadian and Australian dollars, South Korean won, and Japanese yen—as well as bolstering holdings in gold. The share of these alternative assets in global FX reserves has surged to 12–13% by 2023, up from just 2–3% a decade earlier. This diversification strategy aims to spread systemic risk and reflects a broader trend toward a multipolar currency regime—where no single reserve currency enjoys undisputed dominance. While the dollar remains the world’s primary reserve unit, its grip is loosening in favor of a more distributed and resilient monetary landscape.

Motivations – Geopolitics and Sanctions: High-level statements and policy moves from emerging powers underscore that de-dollarization is not purely financial, but also geopolitical. Russia’s exclusion from much of the Western financial system in 2022 (after its Ukraine invasion) sent a stark warning that dollar assets can be politically weaponized. Since then, nations like China have grown more determined to insure against U.S. sanctions by holding reserves outside the dollar systemgfmag.com. Gold purchases by central banks hit multi-decade highs as a sanction-proof store of value – in 2022 central banks globally bought over 1,000 tons of gold (the most on record since 1967), with heavy buyers including China, Turkey, India, and Gulf states. This surge in gold reserves is one facet of the de-dollarization strategy, often explicitly linked to reducing dependence on the U.S. currencygfmag.com. In addition, trade and investment alliances are increasingly bypassing the dollar. For instance, China and Russia conduct much of their bilateral trade in RMB or rubles; India has settled oil imports from Russia in UAE dirhamsgfmag.com; and the China-brokered oil deals with Gulf producers have raised the prospect of the “petroyuan.” Saudi officials have hinted at openness to accepting yuan for oil sold to Chinascmp.comdw.com, chipping away (albeit slowly) at the 1970s-era petrodollar arrangement. In the Gulf, sovereign wealth funds are also reallocating capital into non-U.S. assets (tech investments in Asia, infrastructure in the Middle East, etc.), indirectly reducing future demand for dollars and Treasuriesmecouncil.org.

The motivations behind the global shift away from the U.S. dollar are deeply rooted in geopolitics and the growing fear of financial weaponization. The 2022 exclusion of Russia from major Western banking systems and its frozen dollar reserves served as a wake-up call to other nations: dollar-denominated assets can be leveraged as tools of coercion. In response, countries like China, India, Turkey, and members of the Gulf Cooperation Council have accelerated de-dollarization not just to diversify financially, but to protect sovereignty. Central banks are buying gold at record levels—over 1,000 tons purchased in 2022 alone, the highest in more than 50 years—as a reliable, sanctions-resistant store of value. Parallel to this is the growing use of local currencies in trade agreements: China and Russia now conduct much of their trade in yuan or rubles; India has paid for Russian oil using UAE dirhams; and Saudi Arabia has signaled openness to accepting yuan for oil sales, introducing the potential for a “petroyuan” to challenge the longstanding petrodollar system. Additionally, Gulf sovereign wealth funds are reallocating vast sums into Asia and regional infrastructure rather than recycling petrodollars into U.S. bonds. Together, these shifts suggest a coordinated effort among emerging powers to gradually insulate themselves from U.S. monetary dominance, reducing exposure to the dollar in favor of strategic, resilient alternatives.

It’s worth noting that the dollar remains the world’s preeminent reserve currency by far – no immediate substitute rivals its depth and liquidityreuters.comreuters.com. Even as its share has slipped, the dollar still accounts for 55–60% of central bank reserves and dominates global trade invoicing and debt markets. However, the trendline is clear: the dollar’s hegemonic role is gradually eroding, and foreign demand for U.S. debt is weakening in tandem. Reserve managers are “a cautious breed” and will not dump dollars overnightreuters.com. But they have been steadily diversifying for years, a process now reinforced by the geopolitical “pivot to multipolarity.” As Jamie McGeever of Reuters observes, “No matter how you slice it, the dollar’s overwhelming dominance… is weakening,” even if the currency’s top status isn’t under imminent threatreuters.com. This erosion of the once-unquestioned “dollar pillar” of global finance forms the backdrop for reduced foreign appetite for Treasuries.

While the U.S. dollar still stands as the dominant global reserve currency—accounting for over half of all central bank reserves and leading global trade and debt markets—its supremacy is no longer absolute. Reserve managers, typically cautious and conservative in their allocations, are not abandoning the dollar outright. However, they are diversifying at a steady pace, reflecting a global shift toward multipolarity in finance and geopolitics. The dollar's share of global reserves, once comfortably above 70%, has now declined to the 55–60% range, and while no single alternative rivals the dollar’s unmatched liquidity and depth, the trend is unmistakable. The erosion is subtle but significant: foreign appetite for U.S. Treasuries has waned, not due to panic selling, but from a strategic rebalancing fueled by both financial prudence and political caution. As Jamie McGeever of Reuters aptly notes, “No matter how you slice it, the dollar’s overwhelming dominance… is weakening.” This backdrop—of soft but persistent de-dollarization—underscores broader anxieties about U.S. fiscal sustainability, political polarization, and the risks of asset weaponization.

Impact on U.S. Inflation, Interest Rates, and Policy

Rising Yields and Funding Pressures: The pullback of foreign buyers has tangible effects on U.S. bond markets. Simply put, weaker foreign demand means the U.S. Treasury must offer higher yields to attract other buyers. Indeed, as net foreign purchases waned, U.S. government bond yields have climbed to multi-year highs. In late 2023, 10-year Treasury yields breached 5% for the first time since 2007, fueled in part by what one analyst called a “fire sale of Treasuries” amid global dumpingtheguardian.com. By April 2025 – after another bout of heavy selling sparked by Trump’s tariff escalations – the 30-year yield spiked above 5%, a peak not seen since before the 2008 crisistheguardian.com. Such moves reflect investors demanding greater compensation (higher interest) to lend to the U.S. in the face of falling overseas demand and mounting U.S. deficits. Notably, recent Treasury auctions have shown tepid bidder interest. A May 2025 auction of 20-year bonds, for example, was “poorly received,” tailing at a 5.05% yield and prompting a post-auction sell-off that sent 20-year yields to their highest since 2023reuters.comreuters.com. “There’s just too much debt out there,” warned one strategist, “and the market’s fighting with the government… trying to figure out if we can get this deficit down.”reuters.com In that auction, indirect bidders (a proxy for foreign buyers) took an above-average 69% of the issuereuters.com, but overall demand was still slightly below average. The broader pattern in recent quarters shows foreign “participation… facing structural headwinds”, as the U.S. government’s ballooning supply of Treasuries collides with a shrinking foreign bidreuters.com. This dynamic has emboldened domestic bond investors (the so-called bond vigilantes) to push yields higher, effectively tightening financial conditions for the U.S. government and economy. Each uptick in yield directly translates to higher borrowing costs for Washington: U.S. interest payments on the debt are surging, which itself adds to future deficits – a worrying feedback loop if foreign financing continues to wane.

As foreign demand for U.S. Treasuries has softened, the financial impact has become increasingly clear in bond markets. Without the cushion of reliable overseas buyers—particularly from Asia and the Gulf—the U.S. Treasury has been forced to offer higher yields to entice domestic investors, triggering a notable surge in borrowing costs. By late 2023, 10-year yields breached the symbolic 5% mark, a level unseen since the 2007–08 pre-crisis era, signaling that the cost of financing U.S. debt was rising fast. This trend intensified into 2025, when Trump’s renewed tariff battles and ongoing deficits triggered further sell-offs, pushing 30-year yields past 5%, shaking investor confidence. A particularly weak May 2025 auction of 20-year bonds tailing at 5.05% revealed waning enthusiasm, even as foreign buyers covered 69% of the issue—suggesting that participation is holding up but enthusiasm is cooling. Analysts warn that the sheer volume of new Treasury issuance is outpacing appetite, leading to a growing mismatch. Domestic "bond vigilantes" have taken the opportunity to demand higher returns, exacerbating the Treasury’s funding burden. This spike in yields has not only driven up the federal government’s interest payments—now a significant and rising share of the budget—but risks creating a feedback loop where servicing the debt becomes so costly that it fuels even more borrowing, undermining confidence in U.S. fiscal stability. In effect, the pullback of foreign buyers is no longer a warning—it’s a pressure point that is already reshaping the economic landscape.

Inflationary Cross-Currents: The impact on U.S. inflation is twofold. In the near term, higher Treasury yields help restrain inflation by slowing credit-sensitive sectors (e.g. housing) and cooling economic demand. Indeed, the Federal Reserve has welcomed some rise in long-term yields as it amplifies the Fed’s own tightening. However, a disorderly sell-off of Treasuries could pose upward inflation pressure via a weaker dollar. If foreign investors broadly reduce their USD asset holdings, the dollar’s exchange rate tends to fall, raising import prices for the U.S. (costlier imported goods and commodities). For example, the dollar index dropped about 7.5% over 2023ml.com as overseas investors rebalanced away from U.S. assets, contributing modestly to import price inflation. Additionally, Trump-era tariffs and protectionist policies – partly responsible for some foreign selling – directly drive up domestic prices. Deutsche Bank analysts cautioned in mid-2025 that unless fiscal policy is tightened, the adjustment may come via the dollar: either Washington reins in deficits, “or the non-dollar value of U.S. debt has to decline materially until it becomes cheap enough for foreign investors to return,” effectively implying a weaker dollar or higher yields (or both)reuters.com. In other words, without policy course-correction, the U.S. may face a “risk premium” on its debt in the form of a depreciating currency and imported inflation. This would complicate the Fed’s fight against inflation, as a falling dollar and rising import costs could offset some disinflationary effects of higher rates.

The inflationary ripple effects of shifting Treasury demand are complex and deeply intertwined with the U.S. dollar’s global standing. While rising Treasury yields can curb domestic inflation in the short term—by cooling consumer borrowing, housing, and investment—there’s a less welcome underside: if foreign divestment of U.S. debt becomes widespread, it may undermine the dollar’s value. A declining dollar increases the cost of imported goods and raw materials, which feeds directly into inflation, especially in sectors dependent on foreign inputs. This dual-edged scenario played out through 2023, when the dollar index dropped around 7.5% as international investors pulled back from U.S. assets, amplifying import-driven inflation pressures. Complicating matters further, Trump-era protectionist policies—such as renewed tariffs—added an additional inflationary layer by raising domestic prices for goods that previously flowed in at lower cost. Economists, including those at Deutsche Bank, have warned that unless U.S. fiscal deficits are brought under control, this inflationary pressure may worsen. They argue that in the absence of tighter policy, the U.S. could be forced into a painful adjustment: either a much weaker dollar or significantly higher yields to lure back wary foreign investors. Either outcome injects volatility into the inflation outlook, risking a scenario where the Fed’s monetary tightening is blunted by rising import prices and a depreciating currency—an inflationary feedback loop driven not by demand, but by eroding trust in U.S. fiscal discipline.

Fed and Policy Responses: U.S. monetary and fiscal authorities are increasingly grappling with the implications of reduced foreign financing. Fed officials have hinted that if Treasury market volatility becomes extreme (for instance, in a fire-sale scenario), the central bank might intervene – potentially pausing quantitative tightening or even deploying emergency bond-buying to stabilize the markettheguardian.com. Such intervention, however, runs contrary to the Fed’s inflation-fighting stance and could be politically fraught (drawing accusations of debt monetization). Meanwhile, the Treasury is strategizing to broaden the investor base – e.g. by adjusting auction sizes and maturities to suit domestic demand, and by engaging with allied countries’ reserve managers to sustain their U.S. debt investments. Thus far, domestic U.S. investors have stepped up to buy Treasuries even as foreign official holdings stagnate; U.S. banks, pension funds, and money market funds have absorbed much of the issuance. But this increases the financial system’s exposure to government debt and ties domestic liquidity more closely to federal financing needs.

As foreign appetite for U.S. Treasuries wanes, the Federal Reserve and Treasury Department find themselves navigating a precarious balancing act to preserve market stability and fiscal credibility. Federal Reserve officials have signaled that, in the event of severe Treasury market dislocation—such as a disorderly fire sale or failed auctions—they may be forced to intervene, even if that means pausing or reversing current quantitative tightening efforts. This would involve emergency bond purchases akin to the 2020 pandemic response, but such a move risks being seen as backdoor debt monetization, potentially undermining the Fed’s credibility in fighting inflation. On the fiscal side, the Treasury has been quietly recalibrating its issuance strategy, tweaking auction sizes and maturities to better attract domestic investors while cultivating support from allied foreign reserve managers. So far, domestic institutions—banks, pension funds, and money market funds—have filled much of the gap left by overseas sellers. Yet this internal rebalancing comes at a cost: it deepens the financial system’s dependence on government debt markets and exposes domestic liquidity to fiscal volatility. The broader concern is that this trend ties the health of the U.S. financial system ever closer to the sustainability of federal deficits—leaving less room to maneuver if both inflation and funding stress rise simultaneously.

Looking ahead, many economists expect upward pressure on U.S. interest rates to persist. T. Rowe Price’s analysts note that decreasing foreign demand is one of several factors likely to “push Treasury yields higher” in coming yearstroweprice.com. They argue that with the U.S. fiscal deficit stuck above 7% of GDP and potentially widening with new tax cuts, “the Treasury will need to flood the market with new debt… pressuring yields higher.”troweprice.com At the same time, other major economies are issuing more debt as well, competing for global capital. In such an environment, if traditional foreign buyers (like central banks in Beijing, Tokyo, or Riyadh) are no longer buying in size, the clearing yield on Treasuries may need to rise until new buyers emerge. Some forecasts see the 10-year yield trading in a higher band – perhaps 3.5–5.0% or more in 2025 – rather than returning to the ultra-low levels of the 2010stroweprice.comadvisorperspectives.com. Indeed, market strategists have mused that a 6% 10-year yield is not implausible should foreign demand deteriorate further and fiscal expansion continue unabatedtroweprice.com.

The consensus among many economists and asset managers is that U.S. interest rates are likely to remain elevated, with persistent upward pressure driven by both supply and demand forces. T. Rowe Price analysts point out that weakening foreign demand for Treasuries is a key structural shift—no longer a short-term anomaly but a durable trend that could force the U.S. government to offer higher yields to attract sufficient buyers. With Washington’s fiscal deficit entrenched above 7% of GDP—and potentially growing due to new tax policies and entitlement expansions—the Treasury is set to issue massive volumes of new debt. Meanwhile, global competition for capital is intensifying as Europe, China, and other major economies also increase borrowing. In this environment, the clearing price of Treasuries—the interest rate at which they can be sold—may need to rise further, particularly if central banks in Asia or the Gulf continue to divest or sit on the sidelines. Analysts from institutions like T. Rowe Price and Advisor Perspectives suggest that a 10-year yield in the range of 3.5–5.0% could become the new norm, and some even warn that a 6% yield is possible if deficits widen and foreign participation declines further. This shift would mark a stark departure from the post-2008 era of low rates and raises serious questions about the cost and sustainability of U.S. debt over the long term.

Broader Fiscal & Monetary Landscape: The waning foreign appetite for U.S. debt also carries long-term implications for the U.S. fiscal-monetary nexus. America has benefited for decades from what former Fed chairman Bernanke called the “global savings glut” – vast foreign capital, especially from Asia and oil-exporters, seeking the safety of Treasuries and keeping U.S. rates low. If that dynamic is reversing, the U.S. government could lose some fiscal latitude. Higher debt service costs may crowd out other spending, and the Treasury might face tougher choices in financing its deficits. In a de-dollarizing world, Washington’s policy decisions (fiscal stimulus, sanctions, etc.) will be more constrained by market reactions. As one commentary put it, Trump’s combination of big tax cuts, high spending, and attacks on Fed independence has “upended the logic” that once made U.S. markets a singular safe havenbloomberg.com. If foreign confidence in U.S. Treasuries continues to ebb, the U.S. may need to offer better terms to investors or stabilize its debt trajectory to avoid destabilizing spikes in yields. In essence, the cost of America’s debt addiction could rise. Bond market veterans point out that the U.S. dollar’s reserve status had allowed the country to “suck in so much of the world’s savings” seemingly without consequencereuters.com. Now, with some of those savings being redirected elsewhere, the U.S. must adjust to a new reality of less abundant, more expensive capital.

The shifting global demand for U.S. debt is forcing a major rethinking of America's long-standing reliance on foreign capital to finance its deficits cheaply. For decades, the U.S. has benefited from what former Fed chair Ben Bernanke described as a “global savings glut”—a surplus of capital from Asia and oil-exporting nations flooding into U.S. Treasuries, keeping borrowing costs low and enabling expansive fiscal policy. But with that dynamic unraveling amid de-dollarization, foreign diversification, and mounting geopolitical tensions, Washington’s fiscal leeway may be narrowing. Rising interest costs—now the fastest-growing part of the federal budget—threaten to crowd out defense, infrastructure, or entitlement spending, forcing harder budget choices. Meanwhile, Trump-era policies like tax cuts, aggressive spending, and public challenges to Fed autonomy have unsettled some foreign investors, who once saw U.S. markets as uniquely stable. As foreign buyers pull back, the Treasury may need to offer higher yields or other inducements to maintain demand—especially as debt issuance surges. Analysts warn this represents the end of an era: the U.S. can no longer assume an endless global appetite for its debt. Instead, the government may need to proactively reassure markets of fiscal responsibility or risk punitive borrowing costs. In effect, America’s debt strategy—once insulated by the dollar’s dominance—is now being tested by a more fragmented and cautious global capital environment.

In summary, the 2023–2025 period reveals a clear pattern: foreign creditors are no longer the reliable backstop for U.S. debt that they once were. Taiwan’s caution, China’s selling, and the Gulf’s diversification all exemplify a broader de-dollarization trend, driven by both self-interest and geopolitical strategy. This has begun to reprice U.S. Treasuries and could mark a secular turning point for the global financial system. While the dollar and U.S. bonds aren’t about to lose their key roles overnight, the weakening of foreign demand underscores the need for U.S. policymakers to maintain credibility. As global reserve managers pivot to a more diversified approach, the U.S. faces the twin challenges of financing its deficits at higher rates and safeguarding its currency’s paramountcy in a fragmenting international order. The coming years will test how resilient the U.S. fiscal and monetary regime can be when the world’s “excess savings” no longer flow as freely into dollar assets.

The 2023–2025 window has illuminated a decisive inflection point in global finance: foreign investors are no longer propping up U.S. debt with the consistency of decades past. From Taiwan’s measured unease to China’s sustained drawdown and the Gulf states’ pivot to domestic and non-dollar assets, the message is clear—reliance on Treasuries as the world’s default reserve instrument is eroding. These shifts are not abrupt abandonment but reflect a calculated repositioning, blending financial prudence with strategic hedging against U.S. policy risk, sanctions, and long-term instability. As a result, the U.S. finds itself in a structurally different environment—one where bond yields must rise to attract marginal buyers and where fiscal slack is increasingly penalized by the market. While the dollar and Treasuries remain pillars of the global system, the cracks are visible, and trust, not just liquidity, now determines investor behavior. Policymakers in Washington face the growing imperative to demonstrate fiscal credibility and monetary discipline in an era where the “global safety bid” can no longer be taken for granted. The road ahead will determine whether the U.S. adapts to this multipolar capital order or begins to feel the full weight of its overextended financial model.

Sources: Recent TIC data on foreign Treasury holdingsticdata.treasury.govglobaltimes.cn; statements from Taiwan’s central bankreuters.com; Global Finance and Global Times analyses on China’s reserve shiftsgfmag.comglobaltimes.cn; Reuters and Bloomberg reports on bond market impactstheguardian.comreuters.com; IMF COFER reserve composition datareuters.comreuters.com; T. Rowe Price and Deutsche Bank commentary on yield outlooktroweprice.comreuters.com.

The Brutal Truth June 2025

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