Is it time to worry about the global continuous buying of US bonds, the death spiral?

The surge in US Treasury bond yields in recent days has sparked panic among investors, causing turmoil in the financial markets. Vice President-elect JD Vance has expressed concerns that if bond yields continue to rise, he fears that US bonds may face a 'death spiral'. Nevertheless, US bonds still attract global investors due to their high yields and market Liquidity. Bloomberg has compiled opinions from various investors to explain why global funds continue to buy US bonds.

What is the death spiral of bonds?

The expansion of government deficits is closely related to the death spiral of bonds. When the government's deficit expands, it usually raises funds by issuing more bonds to fill the fiscal gap. However, this will increase the supply of bonds in the market, thereby raising bond yields. As yields rise, bond prices fall, investors may have doubts about the government's debt repayment ability, further selling bonds, forming a vicious cycle.

In addition, the increase in dividend yield will increase the government's borrowing costs, further exacerbating fiscal pressures. According to the latest data released in October, the US fiscal year budget deficit surged to $1.83 trillion as of September. If Trump fulfills his promises of tax cuts and increased spending, the deficit is expected to widen further.

President Trump nominated hedge fund manager Scott Bessent as Treasury Secretary, responsible for overseeing the government's debt sales, which has slightly eased investor concerns. Bessent's nomination confirmation hearing is scheduled to be held in the Senate on Thursday. His goal is to reduce the deficit as a percentage of GDP through tax cuts, spending restrictions, deregulation, and affordable energy.

However, although the US debt ceiling was temporarily lifted at the end of last year, the date was only extended to March of this year, and the debt ceiling crisis is expected to resurface in the near future.

(The United States is facing a debt ceiling crisis, with a government shutdown looming, and Trump is calling for the debt ceiling to be directly abolished)

Overseas investors remain the biggest buyers of US bonds.

Even as US Treasury bonds plunge into a historic bear market, global funds have ample reason to buy. Because US Treasury bonds offer a huge yield premium compared to bonds in Japan, Taiwan, and other places, and Australia's rapidly growing pension industry is increasing its holdings every month based on market depth and liquidity. Compared to some European sovereign markets that are struggling to solve their own fiscal problems, the US also appears safer.

Overseas investors' stance on government bonds is more important than ever. According to the latest data from the US government, as of the end of October, foreign funds held $7.33 trillion of US Treasuries, accounting for about one-third of the outstanding amount, slightly lower than the record $7.43 trillion held in September.

Japan: Enjoy the appreciation of the US dollar while buying US bonds

The benchmark yield on the 10-year US Treasury bond has surged by over one percentage point from its low point in September and may once again break through the psychological barrier of 5%.

Japan is the largest foreign holder of US debt, and despite the increasing awareness of the risks, it remains enthusiastic about purchasing.

Naomi Fink, Chief Global Strategist at Tokyo Nikko Asset Management, said, "The mainstream view in the market is that the size of the US bond market is too large, the Liquidity is too high, and the US coinage tax is deeply rooted, which will not weaken the core role of US bonds in the global central bank reserves."

Note: Seigniorage: refers to the benefit of obtaining actual economic resources after the government or organization issuing currency subtracts the issuance cost from the face value of the currency, and then profiting from the specific income generated by issuing currency.

One of the reasons Japanese investors favor US Treasury bonds is that they provide exposure to the dominant US dollar. By 2024, the country's funds gained a 12% return on unhedged US Treasury bond investments, with 11.5% coming from the appreciation of the US dollar.

China: Low probability of catastrophic collapse

As the second largest foreign holder of US Treasuries, Chinese investors believe that the prospect of a collapse of US Treasuries is very slim.

Ming Ming, Chief Economist of CITIC Securities in Beijing, said that although concerns about rising borrowing costs and fiscal pressures in the United States are reasonable, the possibility of a catastrophic collapse in the bond market is quite low. Moreover, if there is any unnecessary volatility in the U.S. bond market, the Federal Reserve still has plenty of tools to stabilize the market and manage liquidity. This will help alleviate the pressure.

Taiwan: Low interest rates on the Taiwan dollar, US bonds remain a good choice.

Liu Zongsheng, chairman of Yuanta Investment Trust, said: "Despite the ongoing discussion around the 'death spiral', this trend has not slowed down, in fact, as yields rise, money continues to pour in."

The Yuanta U.S. Bond 20-year (00679B) issued by Yuanta is the largest U.S. bond ETF in the Taiwan market, with a fund size of up to 302 billion yuan. Compared with the Yuanta Taiwan 50 (0050), which is the largest and oldest ETF in Taiwan with an asset size of 429.1 billion NT dollars, it can also be seen that Taiwanese investors favor U.S. bond ETFs.

Compared to the 1.66% yield of Taiwan's 10-year government bonds, the yield of the 10-year US bonds is as high as 4.66%. Taiwan's low interest rates have also made the New Taiwan dollar the largest financing currency in Asia recently, which means borrowing in New Taiwan dollars to invest in high-yield financial products, such as high-yield US bond products.

This article, global funds continue to buy US bonds, should we worry about the death spiral? First appeared in Chain News ABMedia.