Two days ago, data released by the U.S. Department of the Treasury revealed a startling piece of news: the U.S. debt balance has exceeded the statutory limit, implying a potential default on U.S. Treasury bonds.
Currently, China still holds $933.6 billion in U.S. Treasury bonds, and this investment may suffer losses in the following three aspects.
What should we do?
01. U.S. Debt Exceeds Limit
Official U.S. data shows that the U.S. debt has surpassed the statutory limit of $31.4 trillion, reaching $31.41 trillion. The outstanding debt balance has exceeded the maximum limit set by Congress, indicating a potential default on U.S. Treasury bonds.
Earlier news indicated that as of December 1, the debt balance was $31.36 trillion. After one trading day, the debt increased by another $50 billion, finally breaking through the statutory limit.
However, the data is constantly changing, and as long as the U.S. authorities take timely action, the debt balance should be able to be slightly reduced and fall back below the statutory limit soon.
But regardless, it is estimated that the U.S. Congress will once again have to pass new legislation to raise the debt limit.
This phenomenon had just occurred in December last year. The previous debt limit was set at $28.9 trillion, but it reached the limit at the end of October last year. After some entanglement in the U.S. Congress, the House and Senate ultimately raised this limit to $31.4 trillion.
However, it is unexpected that just one year later, the limit has been exceeded once again.02, US Treasury Bonds Decline
Perhaps the first loss caused by the United States' continuous increase in the debt ceiling is of a medium to long-term nature, but the other two losses borne by US Treasury bond holders are currently occurring.
This year, the losses for holders of US Treasury bonds have stemmed from the continuous decline in the prices of these bonds, resulting in a constant reduction in the value of the assets.
Usually, when we talk about stocks, we will say that the stock price has risen or fallen, which means we have made a profit or a loss, and it is clear at a glance.
However, when describing the trend of US Treasury bonds, the United States uses a very artistic approach, not talking about the rise and fall of the prices of US Treasury bonds, but only discussing the increase or decrease in the yield of US Treasury bonds.
So, at the beginning of the year, the yield on the ten-year US Treasury bond was less than 1.5%, and it has recently reached more than 4%. Although there has been a slight decline recently, it is still as high as 3.5%. Investors who are not familiar with the situation may think that the current yield on US Treasury bonds is much higher than at the beginning of the year after comparison, which is a good thing.
But in fact, it is just the opposite. The rise in the yield on US Treasury bonds means that the prices of the held US Treasury bonds are continuously falling.
We can see from the monthly K-line chart of an ETF that specifically invests in US Treasury bonds this year that the net value of this ETF has been continuously falling throughout 2022.
At the end of last December, it closed at $26.68, and the lowest point recently was $22.13, a decline of 17%.
Note that US Treasury bonds were once considered one of the safest investments in the world, and now the decline has reached as high as 17%.At the beginning of the year, the total value of US debt held by our country exceeded 1 trillion US dollars. If there were no operations and they were held until now, the loss could reach 170 billion US dollars. There is no need to wait for the US debt to default; the holder has already suffered this loss.
03, Negative returns on US debt
We cannot ignore another aspect of the loss, which is the loss caused by US inflation.
At the beginning of the year, the yield on US debt was below 1.5%, and it has now reached 3.5%. We calculate it at an average of 2.5%, and the interest income that can be obtained by holding US debt is 2.5%.
However, since the beginning of this year, US inflation has exceeded 8% for most months, with the highest reaching 9.1%.
If calculated at an average of 8%, the returns obtained from holding US debt will be completely swallowed up by inflation, resulting in a negative return of 5.5%.
This is equivalent to holding US debt and subsidizing interest to the US government, so it is no wonder that even the US ally Japan is also selling US debt on a large scale.
04, Dilemma
Of course, since the beginning of this year, China has also been selling US debt, with a cumulative amount exceeding 140 billion US dollars.
A large amount of selling has made the US government more and more nervous, always watching China's selling behavior, and even indirectly reminding China and exerting pressure.Therefore, in the first two months, China had previously halted the sale of U.S. Treasury bonds and instead slightly increased its holdings by $4 billion.
The U.S. Treasury bonds we currently hold have become a common concern for both parties. Should we continue to sell for our own interests, or should we hold on to ease the contradictions between the two sides?