Many Americans have heard that they should worry about the staggering size of the national debt. For the first time in modern history, America is paying more interest on its debt, now more than $30 trillion, than it spends on national defense. And there is no end in sight, with our deficits running larger than we’ve seen outside a crisis.
Sadly, the size of the debt is not the only thing Americans need to be concerned about. Who is lending us money also matters, and the characteristics of our creditors have changed over the past decade, leading to higher and more volatile interest rates, which raise mortgage, student loan and other borrowing costs. The shift could also increase the fragility of the U.S. financial system during times of stress.
America has long enjoyed an exorbitant privilege as the world’s dominant economic and financial power. As the United States returned to deficit spending in the 2000s, foreign governments were building up their currency reserves. They stockpiled dollars and Treasuries, prized as the safest and most liquid assets in the world. This gave the United States a structural advantage: These governments bought our debt and were largely indifferent to price, driven by policy mandates rather than profit. It was as though America had a broad and growing base of loyal customers who showed up no matter the cost, rather than shoppers who were ready and willing to walk away for bargains elsewhere. This helped the United States borrow vast sums at very low rates.
By the early 2010s, these foreign governments made up over 40 percent of Treasury holdings, excluding those the Federal Reserve held. That was up from just over 10 percent in the mid-1990s. The Fed — another policy-driven buyer — deepened this cushion through rounds of bond buying during and after the 2008-2009 global financial crisis. At the peak, over half of U.S. debt was financed by institutions that kept borrowing costs artificially low.
Those easy times are over. Foreign governments now make up less than 15 percent of the overall Treasury market. While they still hold roughly the same dollar amount of Treasuries as they did 15 years ago, foreign governments’ purchases haven’t kept pace with the growth in U.S. debt. At the same time, the Fed has reduced its Treasury holdings by roughly $1.5 trillion over the past few years.
So far, the Treasury market has coped pretty well. Private investors have stepped in — a testament to the strength and size of our debt market.
Yet the Treasury market is now more exposed to profit-driven market forces than before, and the country has high amounts of debt, making upswings in interest rates and changes in other borrowing terms very costly. As we sustain and potentially grow our extraordinary deficits, the return of the private sector into our debt markets will most likely result in higher interest rates, as private investors demand greater compensation for holding U.S. debt than their policy-driven counterparts. Rates will probably be more volatile as well, swinging more sharply in response to data, policy signals and America’s now chronic political dysfunction.
U.S. officials are especially nervous about the growing role of hedge funds, whose highly leveraged trades can be disrupted by market turbulence and amplify turmoil in the Treasury market. Over the past four years, hedge funds have doubled their footprint in the U.S. debt market, making the Cayman Islands — where many hedge funds are officially based — the place where the most U.S. debt outside the United States is held, according to the Fed. Typically, people flock to Treasuries for safety in times of crisis. Yet, driven in large part by hedge fund activity, the Treasury market went through unusual turbulence during recent shocks, including the onset of the Covid-19 pandemic in March 2020 and President Trump’s “Liberation Day” tariff announcement in April 2025.
Recently, the United States has seen investors demanding higher premiums to invest in our long-term debt — a reflection of growing uncertainty about the country’s economic and fiscal outlook. According to the most commonly used measure, this premium currently clocks in at roughly 0.8 percentage points for the all-important 10-year Treasury, a seemingly small number that translates into billions of dollars in extra interest costs. These costs aren’t felt just by bond traders on Wall Street or by the government. Higher rates squeeze household pocketbooks and businesses’ bottom lines. They slow economic growth as new public debt crowds out private investment. And since sustainable debt is essential to the government’s ability to perform the functions only it can, changes to the structure of its borrowing capacity can have a profound impact on America’s power.
There’s no need for panic just yet. The dollar remains the world’s reserve currency, and U.S. debt is still the world’s safe-haven asset. No other country comes close to rivaling America’s financial leadership.
But complacency is no strategy. With its debt load increasing and the disposition of its creditors changing, the country must ensure that its debt remains attractive to picky private investors around the world.
That means resisting easy answers to our debt problem. Absent a true miracle, technologies such as A.I. won’t single-handedly grow the country out of its debt. Some observers suggest that the growth of stablecoins, crypto assets backed by Treasuries, will generate huge new demand for U.S. debt. But many new stablecoin holders might simply fund their digital asset purchases from their existing investments in Treasuries.
Most dangerous are proposals for the government to take convenient shortcuts. One would have the Treasury tactically shift what type of debt it issues to take advantage of one-off moves in market conditions — rather than doing so in a regular and predictable manner. Even if feasible, this approach would almost certainly not result in lower borrowing costs in the long term. Another would have the Fed aggressively cut interest rates to make U.S. borrowing cheaper. Indeed, investors are increasingly concerned that the United States might engage in “debasement” to inflate away the real value of its debt — harking back to the days when monarchs diluted their gold and silver coins with cheaper metals such as copper.
Inflating away the debt is a partial default by another name, and the market would treat it as such. History teaches that the foundation of any debt market is credibility: Borrowers must deliver the full value they promised to creditors. Investors buy up mountains of U.S. debt because they trust the system behind it — the independence of the Federal Reserve, the predictability of the Treasury’s issuance strategy, the rule of law and the partnerships that underpin the dollar’s centrality in global finance.
Deviating from these principles would backfire. The reaction could happen gradually. Or, as history shows, it might happen quickly. Credibility takes a long time to earn, but it is easy to lose.
The political operative James Carville once quipped that if he died, he’d like to be reincarnated not as president or pope, but as the bond market, so he could “intimidate everybody.” The bond market has a way of disciplining countries that don’t discipline themselves first — as Britain recently saw when its sovereign debt market revolted against a fiscally unsound budget proposal from the short-lived prime minister Liz Truss.
Financial engineering and false hopes won’t keep America’s lenders happy. Only a credible plan to restrain deficits and control our debt will ultimately do that.
Geng Ngarmboonanant is a managing director at J.P. Morgan Asset Management. He served as a deputy chief of staff to Treasury Secretary Janet Yellen from 2023 to 2025. The views he expresses are his own.
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