The Federal Reserve has started to buy $40 billion in U.S. Treasuries each month, no longer pretending. The direct reason is that Japan is no longer buying.
U.S. Treasury total was less than $5 trillion in 1995, and it will reach $38 trillion by 2025, roughly doubling every 10 years. But looking at the curve, the growth rate is actually getting faster. It broke $10 trillion in 2008, taking 13 years for the first doubling; it reached $20 trillion in 2018, with the second doubling taking 10 years; it will break $40 trillion in 2026, doubling in 8 years.
Now, the expectations about U.S. debt are already public knowledge, but the U.S. government dares not mention it. However, financial transactions are happening every day. The Fed announced yesterday that the tightening has ended, and it will immediately shift to buying $40 billion in U.S. Treasuries each month. Given the inflation rate and balance sheet situation, this should not have been so urgent. But there's nothing else to do; they have to buy, otherwise the U.S. Treasury market would collapse.
The reason is that Japan is no longer buying U.S. Treasuries. Japan, along with China, used to be a major buyer of U.S. Treasuries. China has already exited, not renewing upon maturity, which puts pressure on other buyers. Now Japan's bond market is facing big problems, and it is showing how it could become "zombified," but there is also an immediate impact. Japan no longer has extra money to buy U.S. Treasuries, with its own set of problems, and needs to raise interest rates to stabilize the situation, so institutions need to sell U.S. Treasuries to maintain liquidity.
With Japan no longer buying, if the Fed doesn't step in, rising Treasury yields could shock the market. Since September 2024, the Fed has cut interest rates six times, yet the market interest rates for 10- to 30-year U.S. Treasury bonds have actually risen, reflecting market pressure. Therefore, the Fed buying $4 billion in U.S. Treasuries each month, which amounts to $50 billion annually, is a large amount that can suppress market interest rates.
However, no one is stupid, and they will see that the problems in the U.S. financial system are growing larger. There may be other buyers, just like Japan, who stop buying U.S. Treasuries, forcing the Fed to increase purchases. Although the Fed currently says it will buy $4 billion each month and plans to reduce it to $2 billion, it might end up having to buy $8 billion each month in the future. The market is merciless.
Original article: toutiao.com/article/1851266758403082/
Statement: This article represents the personal views of the author.