The US government's debt problem is becoming increasingly serious, making it hard for the public to ignore. In July, the total US public debt passed the $35 trillion mark, doubling in just 10 years.

The debt ballooned because the government had to borrow money in the bond market to finance its massive budget deficit. A budget deficit occurs when total spending exceeds total revenue, and this has happened in 58 of the past 63 years.

September 30 marked the end of fiscal year 2024, and on October 18, the US Treasury Department released some troubling figures. The budget deficit increased 8.3% from a year ago to $1.833 trillion.

This is the third-highest deficit on record. The only two years the US has reported larger deficits were 2020 and 2021, when the government poured trillions of dollars into fighting the pandemic and stimulating the economy.

However, the issue that the public is less concerned about is how the government raises money to finance deficit spending. And that’s where they should turn to the US Treasury, which is currently led by Secretary Janet Yellen.

The US government’s spending needs are huge, and the responsibility for meeting them falls on the Treasury. This is the government agency whose mission is to promote economic prosperity and ensure the financial security of the US.

The Treasury was created in 1789 and “founding father” Alexander Hamilton was appointed by President George Washington as its first Secretary of the Treasury.

One of Hamilton’s most important achievements was to have the government take over the national debt. And since then, the Treasury has been responsible for handling the US public debt.

The Treasury’s four main functions are to collect taxes, print money, pay bills, and issue debt to finance the operations of the federal government. The last of these is no easy task.

The Office of Debt Management (ODM) within the Treasury Department was created to direct the debt issuance process. The ODM’s primary goal is to finance the government at the lowest cost to taxpayers.

The ODM has built a complex and robust system to meet the Treasury’s needs, but it can’t do it all alone. In fact, ODM has two important partners to achieve its goals.

The first partner is the Federal Reserve Bank of New York, the fiscal agent that runs Treasury auctions. The second partner is a network of market makers (primary dealers) to ensure there are always buyers for the bonds.
Currently, the US has 24 market makers that are authorized to trade government bonds directly. These are banks or brokerage firms that have met strict government requirements.

The first requirement is that they must be adequately capitalized. A brokerage firm that is not affiliated with a bank must have capital of at least $50 million, while a bank must have at least $1 billion in Tier 1 capital.

The second requirement is that market makers must demonstrate that they represent at least 0.25% of the market share of government bond trading. In addition, they must commit to bidding according to regulations and bids that are competitive compared to the general market.

Finally, market makers must have appropriate back-office operations and be members of US clearing organizations to handle transactions smoothly.

In addition, the Treasury Department receives advice from a high-level committee of major Treasury bond buyers and sellers.

Currently, the committee includes representatives from Citigroup, PIMCO, Rokos Capital, Vanguard, Fidelity, BNY Mellon, Deutsche Bank, BlackRock, Bridgewater Associates, Goldman Sachs, PNC Financial, NY Common Retirement Fund, and Morgan Stanley.

The committee meets quarterly and its role is to provide the Treasury with observations about the overall strength of the U.S. economy and make recommendations on debt management.

The Treasury borrows by issuing various types of Treasury securities, such as Treasury bills, Treasury notes, and Treasury bonds. These three types differ primarily in their maturity dates.

Treasury bills, commonly known as Treasury bills, have maturities of less than one year. Treasury notes have maturities ranging from 2 to 10 years, and Treasury bonds have maturities ranging from 20 to 30 years.

In addition, the Treasury issues Treasury inflation-protected securities (TIPS) and floating-rate bonds (FRNs).

Bond issuance is regular, with Treasury bills auctioned weekly and all other types auctioned monthly.

In fiscal 2023, the Treasury issued $22 trillion in new debt. This was raised through 428 auctions—8.2 auctions per week, and each auction raised an average of $51 billion.

Figures for fiscal 2024 are not yet complete. However, in the first nine months of the year, the Treasury issued $21.4 trillion in new bonds, up 34% from the same period last year.

The Treasury not only issued more bonds to cover budget deficits, but also had to manage to roll over maturing debt, finance debt buybacks, and balance the government budget.

In the first half of fiscal 2023, the Treasury was constrained in its ability to issue debt due to the debt ceiling. The debt ceiling is the limit on how much the US government can borrow. Whenever the debt reaches the ceiling, Congress must vote to raise the debt ceiling.

Recently, the debt ceiling has been used as a political tool whenever the Republican Party or the Democratic Party wants to pressure the other party to make concessions on their policy demands.

In the spring of 2023, when Congress was deadlocked over the debt ceiling, the Treasury Department had to use special tricks to prevent the US government from defaulting. The deadlock was then resolved when Congress agreed to suspend the debt ceiling until January 2025.

Economists warn that the Treasury Department will likely face challenges early next year when the debt ceiling issue returns, especially in the context of the US (at that time) having just experienced a tense election season and the political conflict between the two parties still smoldering.

Under Donald Trump’s tax and spending proposals, the primary deficit would increase by $5.8 trillion over the next 10 years on a conventional basis and $4.1 trillion on a flexible basis, which includes the economic effects of fiscal policy.

Under a Harris administration, the primary deficit would increase by $1.2 trillion over the next 10 years on a conventional basis and $2 trillion on a flexible basis.

However, JPMorgan analysts said that outlook is unsustainable regardless of who wins the presidency, acknowledging the possibility of a larger deficit under a Trump presidency.
“Regardless of the election outcome, the trend since the COVID-19 pandemic has been one of profligate fiscal policy absorbing significant capital and encouraging more private investment,” the bank said. “At the same time, the mass retirement of the baby boom generation is shifting a significant portion of the population from a period of high savings to a period of low savings, reducing the supply of capital.”

4-2024
According to the US, in April 2024, total foreign holdings of US government bonds reached $7.965 trillion, up from an adjusted $7.945 trillion in January 2024. Foreign holdings of US Treasury bonds increased 8.7% year-over-year.

Belgium was the largest holder of U.S. government bonds, up $27 billion to $320 billion. Japan also increased its holdings of U.S. government bonds to $1.167 trillion, the largest since August 2022 when it held $1.196 trillion.

As of April 2024, the top five holders of U.S. debt were Japan ($1.1 trillion), China ($749.0 billion), the United Kingdom ($690.2 billion), Luxembourg ($373.5 billion), and Canada ($328.7 billion).

7-2024
The US Treasury Department announced on July 18, 2024, that foreign investors held $8.129 trillion in US Treasury bonds as of the end of May, up from $8.04 trillion in April.
The yield on the 10-year US government bond fell from 4.684% at the beginning of May to 4.512% at the end of the month. The yield on the 2-year bond fell from 5.046% to 4.893%.
Japan remains the largest foreign holder of US Treasury bonds with $1.128 trillion, down from $1.15 trillion in April.
China ranked second, with its US bond holdings reaching $768 billion as of the end of May, down from $771 billion in April.