The US Bond Market Has Never Seen This Before

Added: 2026-05-12

[00:00:00]The US Treasury bond market has lost 50% of its value over the past 6 years, marking one of the worst draw downs in its history. And even more recently, just in the month of March, it wiped out another $1.2 trillion, now sitting right at a critical pivot point, a trend line that's already been tested multiple times since 2024. At the same time this is unfolding, foreign central banks have been steadily reducing their holdings of US treasuries. In fact, that trend is accelerating as geopolitical tensions begin to rise. So, if this level breaks and the current trend continues, the bond market could come under even more pressure from here. And because bond prices and yields move in opposite directions, a falling market tends to push yields higher. That means mortgage rates may go higher, car loans get more expensive, and the US government could pay hundreds of billions more in interest every year. But to understand whether that's probable, we need to step back and look at why foreign buyers are reducing their exposure in the first place. And most people tend to turn to the debt volume explanation for this.

[00:01:00]Right now, total government debt has climbed to over $39 trillion. And in just the past year alone, another $3 trillion has been added. At the same time, the government is still running close to a $2 trillion budget deficit each year. That essentially means instead of paying down debt, it has to keep borrowing just to maintain current spending. So at first glance, that trajectory does look increasingly unsustainable. And it would make sense why foreign central banks might want to reduce their exposure. But if we look a little closer at the timing, something doesn't quite add up. See, the US has been running budget deficits for more than two decades. And yet during most of that time, foreign central banks were still increasing their holdings of US treasuries. It wasn't until around 2022 that we started to see that trend reverse, which suggests that the debt story might just be the tip of the iceberg. There could be a deeper force at play here, something beyond simple debt math. And that may be tied to a broader shift that billionaire investor Ray Dalio describes as capital wars.

[00:01:57]See, when Russia invaded Ukraine in 2022, the US and its allies froze roughly $300 billion of Russian assets that had been built up over decades.

[00:02:06]Now, that move was targeted at Russia, but it sent a much broader signal because for other countries, it highlighted a new kind of risk of holding US-based assets. And since then, we've started to see a gradual shift in behavior. Countries like China have been steadily reducing their treasury holdings. Some Middle Eastern nations have also trimmed exposure. Even Japan, one of the largest holders, has shown signs of slowing demand, and up until recently, Europe had remained one of the more stable sources of demand. But even that may be starting to change. Over the past year, the US has introduced new trade restrictions and tariffs affecting multiple regions. And at the same time, global tensions have continued to rise.

[00:02:42]Some analysts, including those at Deutsche Bank, have started to raise the possibility that Europe could also begin to reassess its US Treasury exposure.

[00:02:50]And that's where things could start to get more challenging for the US. Because this year alone, the government needs to refinance roughly $9 trillion of its existing debt, which means issuing a large amount of new treasuries into the market. That demand historically has been supported not just by domestic investors but also by foreign buyers. So if that external demand starts to weaken, the system becomes more sensitive. But it's important to step back and look at this in context.

[00:03:14]Foreign central banks hold roughly $3 trillion of US treasuries. That's around 11% of the total market, which is now around 28 trillion. So while that's a meaningful share, they're not the largest holders. The Federal Reserve, for example, holds roughly $4.5 trillion. and domestic institutions like pension funds, banks, and insurers hold significantly more, around $12 trillion.

[00:03:38]So even if foreign demand starts to soften, it doesn't mean the market suddenly loses all of its buyers. And in more extreme situations, the Federal Reserve can step in as a buyer of last resort to prevent yields from rising too quickly, which is what they've done more recently. But this comes with real consequences. Because when the Fed steps in to buy treasuries, it essentially means creating more money. More money in the system means more dollars in circulation and over time that tends to reduce the value of each dollar. And that dynamic is perhaps why foreign central banks have been steadily increasing their gold holdings. In fact, for the first time since the mid1 1990s, their gold reserves have surpassed their holdings of US treasuries and countries like China have been buying gold for the past 17 months. So when you put all this together, what we're likely seeing isn't a sudden collapse in the US debt market.

[00:04:22]It's something more gradual, but potentially more important, a shift in how global capital is being allocated.

[00:04:28]And for investors, understanding that shift and adapting to it may matter more than ever. At Capital.com, we'll keep tracking treasury markets, foreign capital flows, and the macro forces shaping the global financial system in 2026. Hit like and subscribe to stay tuned. Thanks for watching.