China & Japan Are Dumping US Bonds
In a Nutshell
China and Japan are selling hundreds of billions in US Treasuries, driving 30-year yields above 5% and creating a trap where the Federal Reserve cannot cut rates without breaking the bond market. Foreign selling, 6% PPI inflation, and $39 trillion in US debt force higher yields, which increases government interest costs above $1 trillion annually and risks triggering money printing. The stock market's record valuations and expectation of bailouts are misaligned with a Fed that may need to raise rates instead.
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A global sovereign debt crisis is underway as countries sell US debt. The bond market serves as the backbone of all markets. Yields are reaching the highest levels in decades while the stock market continues rallying. Investors stop trusting governments to pay back borrowed money and demand higher interest rates, which worsens the problem. The US 30-year Treasury bond yield has exceeded 5%, the highest level since July 2007. The 10-year bond yield has risen 75 basis points since the Iran war began.
Chris Waller, previously supportive of rate cuts, now states he is prepared to vote for rate increases if the war continues and inflation does not decline. He stated: "I can no longer rule out rate hikes further down the road if inflation does not abate soon. And that is especially true if measures of inflation expectations, some of which have risen lately, show signs of becoming unanchored." The market now predicts a rate increase by January 2027 with over 70% odds that interest rates will rise. A year earlier, Wall Street expected the Federal Reserve to cut rates three to five times.
China and Japan, two of America's largest foreign buyers of debt, are now selling US government debt. Additional countries selling include Taiwan, Saudi Arabia, India, the UAE, Norway, and Singapore. Oil has remained above $100 per barrel for approximately two months. The PPI inflation measure reached 6%, the highest level since 2023. CPI has returned to 3.8%, well above the 2% target.
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