The discussion surrounding U.S. government debt often centers on its substantial size, raising concerns about sustainability and potential economic impacts. However, a closer examination reveals that the implications of this debt extend far beyond mere figures. Investors should not only consider the total debt amount but also the broader context that shapes its relevance.
Unlike the debts incurred by individuals or corporations, sovereign debt has a unique risk profile influenced by various factors, including ownership structure, currency, and the systems that facilitate its issuance and trading.
Viewed through this lens, it becomes clear that U.S. debt is evolving into something resembling financial infrastructure rather than just a straightforward liability on a balance sheet.
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Why debt ratios provide limited insights
The United States’ debt-to-GDP ratio, currently around 128%, positions it alongside nations such as France, Italy, and the United Kingdom. However, this comparison can be misleading without considering the composition of the debt. For instance, Japan holds a staggering debt-to-GDP ratio exceeding 230%, yet it does not face acute funding crises. The core issue lies not in the total debt amount but in the reliance on foreign creditors.
To illustrate this point, consider the following statistics: China has a debt-to-GDP ratio of approximately 102%, with only 3% held by foreign entities, while Japan’s higher ratio includes around 12% foreign-held debt. In contrast, the U.S., with its 128% ratio, has about 22% of its debt held internationally. This intricate makeup indicates that the U.S. primarily finances its debt domestically, a crucial factor that overshadows the headline figures.
Who owns U.S. debt?
Data from the U.S. Treasury TIC data, the International Monetary Fund, and reports from major U.S. dollar stablecoin issuers reveal that roughly three-quarters of U.S. debt is held domestically. This includes funds allocated to intragovernmental accounts such as Social Security, the Federal Reserve, and various U.S. institutions, including pension funds and insurance companies. It is important to note that ‘domestic’ does not imply government control, as it encompasses private entities driven by individual incentives.
While foreign holders account for about 22% of the debt, the landscape has shifted in recent years. Japan has become the largest foreign creditor, while China has reduced its exposure. This diversification now includes European countries, oil-exporting nations, and reserve managers, indicating a strategic repositioning rather than a capital flight.
A transformation in the role of debt
Today, we observe a significant shift in the management and utilization of U.S. debt. Rather than being solely the responsibility of sovereign entities, debt is increasingly mediated by systems involving various market participants. Central banks are facing balance-sheet constraints, and sovereign reserve managers are diversifying their portfolios.
Amid these changes, a new entity has emerged as a key player in the market: stablecoins. These digital currencies have moved beyond their initial novelty, serving as essential conduits for dollar settlements. As their balance sheets increasingly include U.S. Treasury securities, stablecoins are reshaping the demand dynamics for U.S. debt.
The appeal of Treasuries for stablecoins
The attraction of U.S. Treasuries for stablecoins is based on structural necessities rather than ideologies. Regulatory frameworks favor risk-free assets, while liquidity demands necessitate short-duration investments. Transparency requirements call for marketable assets, and the need to mitigate redemption risks drives stablecoins toward cash-like instruments. Consequently, Treasuries are not merely optional; they represent the only viable asset class capable of functioning at scale.
As stablecoin supply continues to grow, the potential for significant Treasury allocations increases. For example, a hypothetical increase to $500 billion in stablecoin supply could translate to approximately $350 billion in U.S. Treasuries. This influx of stablecoin demand stabilizes the short end of the yield curve, alleviating refinancing pressures and providing a liquidity safety net during market downturns.
Reframing the debt debate
Unlike the debts incurred by individuals or corporations, sovereign debt has a unique risk profile influenced by various factors, including ownership structure, currency, and the systems that facilitate its issuance and trading. Viewed through this lens, it becomes clear that U.S. debt is evolving into something resembling financial infrastructure rather than just a straightforward liability on a balance sheet.0
Unlike the debts incurred by individuals or corporations, sovereign debt has a unique risk profile influenced by various factors, including ownership structure, currency, and the systems that facilitate its issuance and trading. Viewed through this lens, it becomes clear that U.S. debt is evolving into something resembling financial infrastructure rather than just a straightforward liability on a balance sheet.1
