Are US Treasuries Losing Their Reserve Status?

Ajouté : 2026-05-12

[00:00:00]In the past week or so, we've seen a number of anxietyinducing headlines about America's fiscal situation. The debt to GDP ratio, excluding debt held by public institutions, ticked above 100% for the first time since 1946. And the yield on 30-year bonds briefly ticked up above 5%, spelling more bad news for a country that's already spending an absurd amount of money just paying off the interest on its existing debt pile. So, in this video, we're going to take yet another look at America's fiscal situation and explain why there's at least two reasons to think that things look more precarious today than they did only a year or so ago.

[00:00:45]The next issue of our magazine is out very soon with this issue focusing on all of the wars that Trump has been involved in during his second term. with each dot on the cover representing a different military intervention or strike. Inside, we run through each of the conflicts from Venezuela and Iran to Yemen and Ecuador, as well as discussing what he's really doing. Pre-order your copy today at twolong.news.

[00:01:10]The first reason for concern is that in short, the US seems less capable of balancing its books than ever before with the deficit coming in at over 5% of GDP every year since 2020. As you might remember, during the campaign, Trump promised to reduce the deficit, largely via a combination of spending cuts and tariffs, which was supposed to provide a new source of revenue. While the spending cuts didn't really materialize, not least because Elon Musk's Doge failed to find anywhere near as many savings as Musk promised it would, Trump's tariffs did actually generate a sizable revenue stream for the federal government. In 2025, for instance, tariffs brought in something like $200 billion worth of revenue, a bit less than 4% of the 5.2 trillion of total revenue collected by the government that year, or about 1% of GDP. This might not sound like much, but 1% of GDP is a non-trivial amount from a fiscal perspective. And markets are generally a lot more sympathetic to, say, a 4% budget deficit than they are to a 5% budget deficit. Unfortunately, any progress Trump might look like he was making towards balancing the books has been undone by recent events. For starters, in February, the Supreme Court ruled against most of Trump's tariffs, and the administration has since started issuing refunds to importers. Trump is going to try and recreate his tariffs via a different piece of legislation, specifically section 301 of the US Trade Act of 1974. But section 301 tariffs have to be preceded by an investigation by the United States trade representative and will probably be subject to further legal challenges. The point we're trying to make is that it's at least the case that tariffs are no longer a reliable source of revenue for the federal government and revenues were probably going to fall in the future anyway as countries redirected exports away from the US towards other markets.

[00:03:03]Given that the total tax intake was already expected to flatline in the coming years, if tariff revenues decline, total tax intake will probably start shrinking. At the same time that the tax intake is flat or falling, federal spending will probably rise, leading to an ever widening deficit.

[00:03:20]Federal spending was already on the up, largely thanks to forecast increases in Medicare and Social Security spending.

[00:03:26]But this trend could be supercharged by Trump's plan to ramp up military spending. For context, Trump has recently started talking about increasing the US defense budget, which currently stands at about $1 trillion a year, by far the biggest in the world, by another 500 billion. And this apparently excludes the amount that the US will have to spend to restock inventories and repair infrastructure affected by the recent war in Iran. If Trump gets his way, this could put real strain on America's public finances and could push the deficit towards more like 7% of GDP. given that $500 billion would basically put another 2% on top of the existing 5%. Anyway, the second reason to worry about America's fiscal situation is that there's some tentative evidence to suggest that the US government's bonds are losing their status as effectively the world's reserve debt instrument. For context, as you might already know, the US dollar is widely considered the world's reserve currency. that is the currency that central banks and other big financial institutions like to hold in their foreign exchange reserves. This is essentially because the dollar is considered particularly safe in that its value is relatively stable and very widely used, especially international trade. The dollar's reserve status bestows some advantages on the US, including a stronger dollar and reduced exchange rate risk. However, at least as advantageous for the US is the fact that US government bonds, commonly known as treasuries, are effectively the world's reserve bond. In other words, if you want a safe investment, but you want a better return than just plunking your money in cash, treasuries are your go-to. This is largely because the US is a massive economy and because, somewhat paradoxically, it issues a lot more debt than most other big countries. This means that there are lots of treasuries slloshing about, which means that they're easy to buy and sell. And this liquidity is one of the big reasons they become the world's reserve bond. Their status as the world's reserve bond and the dollar status as the world's reserve currency are also mutually reinforcing.

[00:05:28]The dollar's reserve status made treasuries more appealing because treasuries could be sold for dollars and their interest was paid in dollars.

[00:05:36]While treasuries reserve status made the dollar more appealing because well you need dollars to buy treasuries. This has been great for the US because additional reserve related demand for treasuries has allowed the US government to borrow more money than it would be able to otherwise and is a big reason why the US has been able to run persistently massive deficits since the pandemic without too much fuss. Anyway, their status as a reserve asset has meant that during times of crisis, both treasuries and dollars usually go up as investors flock to so-called safe assets. What's been remarkably interesting about the war in Iran, however, is that while the dollar has gone up, treasuries have actually gone down with yields rising accordingly because when treasuries sell off, the yield the US has to offer to attract buyers effectively rises. New York Fed data suggests that this was in part because central banks actively sold off treasuries in the wake of the war.

[00:06:32]This suggests that while the dollar retains its appeal as the world's reserve currency, treasuries are apparently losing their appeal as the world's reserve bond. Yet more evidence for this comes from recent bond auctions, which is when the US government actually tries to sell new debt to the markets. Unfortunately for the US, at the most recent auctions, demand for treasuries has come in conspicuously soft, which means that so-called dealers, in other words, big banks that are obliged by regulation to mop up any spare treasuries, have had to step in to fill the gap. As a final thing, there's some evidence suggests that the treasury market is currently being boyed by AI related optimism. A couple of academic papers have observed that treasuries tend to rally every time a big American company releases a new AI model, suggesting that markets are optimistic that advances in AI will help the US balance its books. Maybe. But this does create a downside risk.

[00:07:25]Namely, that if AI disappoints, the Treasury market could end up in even more trouble. As I mentioned, the next issue of Too Long is out very soon.

[00:07:34]Plus, if you subscribe using promo code summer26 at checkout, you'll get 20% off every copy as long as you stay subscribed, plus an additional £3 off your first copy. It's not just Trump's wars and conflicts, either. The summer issue of Too Long contains news from each region, including pieces from elections around the world, including the UK, Bulgaria, Hungary, Slovenia, and Denmark. a piece on whether we're heading into a new world war, the euro's missing members, an update on what's happened following the Gen Z protests of last year, as well as a rundown of Trump's continued threats towards Greenland. Speaking of Greenland, if you didn't already know, we visited Greenland to film a series called What's the Big Deal with Greenland? While we were there, we explored the vast, impenetrable country, camped out on a glacia, and drove to the US's abandoned military bases. The first episode will be out very soon with all episodes exclusively available to TLDDR Party members. You can learn more about TLDDR Party by clicking the link in the description, but the cheapest way to sign up is in a bundle with Too Long.

[00:08:39]So, if you're going to subscribe to the latest issue of the magazine, then consider grabbing yourself a TLDDR Party membership at the same time. Find out more about both at toolong.news.