Bullets:
A staggering $11 trillion in US government debt needs to be borrowed or refinanced over the next 12 months.
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Treasury Department officials are faced with painful choices, whether to borrow at very high rates, locked in for ten years or longer? Or instead borrow for one year or less, but at massive volumes?
Foreign governments and pension funds are also showing far less interest in absorbing new US government bonds, and are demanding ever-higher yields to compensate for inflation and policy risk.
China’s government, however, can borrow at far below half the rate Washington pays, across all maturities. And Chinese companies are paying the lowest interest rates in their history to access new capital.
That represents a long-term structural advantage to Chinese policymakers and industry.
Report:
Good morning.
This is a table of 10-year government bond rates. It is the annual cost of borrowing, for these governments, for 10 years. The United States pays an average of 4.28% interest per year, to borrow money for 10 years. For China, borrowing money for 10 years costs its government just 1.7% per year. Borrowing rates in China are falling, across its entire yield curve—the 2-, the 10- and the 30-year bond rates are declining, steeply.
This means that China’s government can access capital markets at less than half the cost that the United States government can.
The economy here is very strong, with China’s exports rising much faster than experts predicted, and this while inflation at the household and producer levels doesn’t exist—prices are falling economy-wide, as factory and supply chain productivity increases.
The lower cost of capital for China has important knock-on effects. This is a report on China’s Belt and Road Initiative. This analysis is quite critical, actually, of China’s lending to developing economies. But they point out that China’s overseas lending carries a weighted average interest rate of 4.2%. Said another way, governments in Africa and South America can borrow US dollars from banks in China, at a lower interest rate than the United States government can borrow US dollars from investors in the United States.
That isn’t supposed to happen, obviously, and it’s the result of a perfect storm, where everything is coming together for them, and falling apart for us, at the same time. When the new Treasury Secretary, Scott Bessent, took the job, he was already concerned about the interest rate problem, and how that needs to better inform how the US government borrows money. Treasury needs interest rates to come down, before borrowing more money at longer maturities. In other words, it’s getting too expensive for the US government to issue debt at ten years or longer, so they’re instead planning to borrow at much shorter maturities, by selling short-term bonds—T-bills—that need to be rolled over more than once per year. President Trump agrees, that until the Federal Reserve gets a new Fed Chairman who cuts interest rates and makes it less expensive to borrow for longer terms, they will be borrowing much more at the short end.
There are big problems with that strategy though. The first problem is the volume of new borrowing is just too high—the US government needs to borrow a staggering $2 trillion a year. So investors are demanding higher yields anyway—no matter what the Fed does. Inflation is still running hot, tariffs are a serious problem that are now hitting producer prices, and there is no end to the deficits, which just run higher and higher. Borrowing rates for consumers and businesses reflect all those problems.
The second problem is that the Federal Reserve doesn’t have nearly as much influence on interest rates as borrowers believe. Federal Reserve can cut rates, but the Fed doesn’t move the needle much for households and small business borrowers. That’s because when the Fed announces a rate cut, that refers to the rate banks lend to each other, which is usually overnight. It has no effect on mortgages, or on interest rates on the 10-year Treasury bonds—which are highly correlated. Mortgage rates track very closely with the 10-year bond rates, because banks need to borrow money long term in order to lend long term. The difference there between the blue line and the black shows the spread between government 10-year rates and 30-year mortgage rates. They move together:
So when Jerome Powell loses his job and the new guy cuts interest rates five minutes later, it isn’t going to matter very much to new homebuyers, for example. The Fed cut rates three times recently, and mortgage rates didn’t move. Mortgage rates stayed high because the 10-year bond yield stayed high.
The reason for these high rates–these high borrowing costs for the Treasury department, and for homebuyers, and for businesses–is that the country’s financial position now is terrible, and the problems are structural, and deep. Over the next year—the next four quarters–$9.2 trillion need to be refinanced. That is existing debt, which needs to roll over. Most of that debt was taken on when interest rates were a lot lower, by the way, so rolling over that $9 trillion is going to cost much more in interest payments than when first issued. In addition, there is another $1.9 trillion in new borrowings. That is a total of over $11 trillion for the next year.
So this total debt line is getting steeper, and is now at the highest level in history, compared to the size of the economy. It cost the United States less, relatively, to fight World War 2 and rebuild the economy of Western Europe, than it does today just to keep the lights on in Washington. A large driver of that, going forward, is high levels of new debt issuance, at higher interest rates, to refinance previous debt:
That adds up to lots of problems. There isn’t enough money sitting around, across the entire galaxy, to keep this going for much longer. The capacity of global capital markets to absorb all this new debt is pushing borrowing costs up, not just for the US government, but for everyone else.
So investors are looking very closely, for signs that things are about to go off the rails. In particular, it’s these two things—and these are also closely correlated: Treasury bond auctions, and how well those go; and how much appetite we see from investors across the world to buy more Treasury debt.
We did a video last year, that as the Chinese recycle their trade surpluses into things besides US treasury bonds, it’s an ugly scene. Chinese financial regulators are buying a lot of gold, and they’re also bringing back a lot of the dollars they earn abroad and parking them in their own banks, and financing, for example, Belt-and-Road projects in friendly countries. But China is not merely refusing to buy new Treasury bonds, they are net sellers of US government debt they’ve already got. Beijing’s holdings of Treasuries today are the lowest in over 16 years:
So China was already not showing up for Scott Bessent’s Treasury auctions. Now they have company. Over just the past week, we had three days in a row that go to answer this question here: how are the debt auctions going, and how many foreigners are showing up?
Wednesday, 6 August, an auction of 3-year debt with the worst foreign demand since 2023. “Tailing” means that the yields were rising throughout the auction—as this bond sale dragged on, new buyers demanded higher yields compared to the first lenders, earlier in the day. “Indirects” is foreign governments and major foreign institutions, they were the lowest since December 2023. Buyside demand from foreigners is “surprisingly” weak.
The next day, 7 August. $42 billion in 10-year paper. “Very ugly”, this time. Another tailing auction, and another auction with falling foreign demand. And it was surprising, again.
Day after that, 8 August. “Very ugly” again, on this sale of $25 billion of 30-year bonds, which was probably the worst auction of all. Foreign buying interest was the second lowest in 5 years. That auction Friday was so bad that rates went up along the whole curve—that’s a misprint—that should read 10-year yields, not 10%. The bond market is saying that when the Fed does cut rates, the market believes that inflation is going to shoot up, along with borrowing costs for anyone buying a house or a car. The yield curve will get steeper—very low rates overnight and for maturities out a few months—which may help Bessent and Trump with borrowing costs—for awhile anyway. But for everyone else, borrowing rates and costs are going a lot higher.
There is absolutely no good news here, for the US government, or for American borrowers, or for American companies. This data point is shocking—it’s almost impossible to believe. An African government can borrow US dollars, for a lower rate of interest, from a Chinese bank to build a railroad, than the American government can, and especially compared to an American family borrowing US dollars from an American bank to buy a house.
China and the BRICS countries have built a new financial system. Their governments, their companies, their families—and now companies and governments in friendly countries—they borrow money for less than half what we do. Access to low-cost capital is what drives everything else—consumer spending, household formation, business investment in Research and Development, government infrastructure projects. We don’t have that access anymore.
Resources and links:
South China Morning Post, China cuts US Treasury holdings for third month amid trade war, debt ceiling fears
Zerohedge, Yields Spike After Very Ugly, Tailing 30Y Auction Sparks Steepening Fears
ZH, Very Ugly, Tailing 10Y Auction Sees Slide In Foreign Demand, Plunge In Bid To Cover
ZH, Ugly, Tailing 3Y Auction Sees Worst Foreign Demand Since 2023
https://www.zerohedge.com/markets/ugly-tailing-3y-auction-sees-worst-foreign-demand-2023
Managing Risk in the Face of Historic U.S. Debt Refinancing
What Is Happening with Mortgage Interest Rates?
https://www.schwab.com/learn/story/what-is-happening-with-mortgage-interest-rates
How the Federal Reserve Actually Affects Mortgage Rates
Wall Street Journal, Trump and Bessent Bring New Style to Managing America’s Debt
Banking on the Belt and Road: Insights from a new global dataset of 13,427 Chinese development projects
https://docs.aiddata.org/ad4/pdfs/Banking/_on/_the/_Belt/_and/_Road/_Executive/_Summary.pdf
China 10-Year Government Bond Yield
https://tradingeconomics.com/china/government-bond-yield
What do falling Chinese yields tell us?
https://www.dws.com/insights/cio-view/charts-of-the-week/cotw-2025/chart-of-the-week-20250117/
X, Corporate borrowing costs in the US have never been lower than China’s today
https://x.com/UnHedgedChatter/status/1945694176542412931
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