The Hidden Fragility of UST - Markets

How Changing Holder Structures Challenge the Global Safe Asset

Author: Michael J. Cyrus

Date: April 2025

Introduction

The United States Treasury market has long been considered the anchor of global finance — the ultimate "safe asset." However, given the recent turmoil in equity-, bond- and derivatives markets, the tariff stand-off and the continued (massive) budget deficits, there has been quite a bit of chatter whether this is the beginning of the end of the USD as a reserve currency or whether the US can continue on its path or needs to adjust.

I cannot see an imminent cataclysmic event – in particular, because the US does more or less 100% of her funding through USD denominated debt, not foreign currency. Hence, different to other countries (in particular emerging markets), it can issue debt in the USD, a currency it can create at will.   

However, profound shifts in the structure of U.S. debt holdings and the maturity profile of federal liabilities are raising questions about the resilience of the USD as a cornerstone of international currency and debt markets. This article explores the evolving composition of U.S. federal debt, the risks created by rising short-term financing needs, and the potential systemic consequences.

Decomposition of U.S. Federal Debt (2025 Estimate)

Chart 1: Decomposition of U.S. Federal Debt (Market-Held, Fed Holdings, Intragovernmental Holdings)

• US Treasury Debt ~ 28 Trillion USD
• Market-Held Debt: ~16.7 Trillion USD
• Fed Holdings: ~5.3 Trillion USD
• Intragovernmental Holdings: ~6.0 Trillion USD

Structural Changes Over Time (2000–2025)

Currently, around 40% of US – debt is being held by US public institutions. In statistical aggregates, the central bank inventory is usually recorded under “publicly held assets”, because, the Federal Reserve (FED) is not the Federal government. However, it does make some sense to show it independent of “other” publicly held debt, because, clearly the incentives of a central bank are more aligned with the government than with private investors.

In recent years, the FED has increased its’ inventory, whereas the intragovernmental inventory has decreased steadily. All – in, the FED has stabilized the public holdings of US government debt at around 40%. We also see a clear increase of inventory held by state institutions since 2019. 

Chart 2: Relative Composition of U.S. Federal Debt (% of Total Debt)

Key monetary events impacting the structure:

• Global Financial Crisis (2008–2009)
• Quantitative Easing Programs (QE1, QE2, QE3)
• COVID Crisis (Massive QE, 2020)
• QT (Quantitative Tightening Restart)

 Now, taking it together, it becomes obvious, that the FED to some extend has more or less neutralized the declining demand by Intragovernmental Holdings over the medium and long term. But it also becomes clear, that the Fed has done that in a much more activist way and it is also clear, that these activist interventions surely have an impact on longer term interest rates as well. So, the idea that central banks should stay clear of longer-term capital markets and focus on short-term interest seems to be abolished after 2010.  

Who Holds the Market-Held Debt in 2025?

Chart 3: Major Holders of U.S. Treasuries[1]

This diagram shows some of the more problematic or stabilizing factors in the development of those UST held by market participants.

1.       The share of Hedge Funds has developed quite explosively. Given that a large part of this inventory is held as part of leveraged Basis trades against limited capital, it is obvious that this is a deterioration of the quality of ownership. The hedge fund inventory can only stay at current levels if market liquidity remains robust and funding conditions stable. However, you can argue that with the recent turmoil in markets, there was quite some blood shed in hedge fund positions.

2.       At the same time, Banks have been regulated out of the market. And you could argue, that Hedge Funds have crowded into the gap. Leverage Ratios, NSFR, LCR, etc. make it increasingly and intentionally expensive / uneconomical to hold government debt. Not only in the US.

3.       In light of recent geopolitical tensions — and the experience of countries like Russia, Syria, or Venezuela — China has been steadily reducing its UST holdings over the past years

4.       However, as can be seen in the diagram, this is not just a development with regard to China, in general, foreign governments have reduced their holdings of UST, perhaps for similar reasons. Decision makers in Washington and Brussels may have underestimated, that one hallmark of a reserve currency is, that it is counterparty risk-free. But counterparty risk -free in the context of a reserve currency also means, that that the issuer of that reserve currency is so aware of the benefits he enjoys, that he will not sanction its use. The fact, that the US seems to be openly discussing haircuts or “voluntary” conversion of short-term debt into 100 year bonds, which is a form of financial repression – if not technical default is also something that does not rhyme with the political goal of being a reserve currency.  

5.       One development often overlooked is the steady growth of the "Others" category. Since 2000, the share of Treasuries held by "Others" has roughly doubled. This is not an accident. It reflects three deeper structural trends:

• Fragmentation of Capital Markets: The once centralized ownership by banks, sovereigns, and primary dealers has given way to a more dispersed structure involving pensions, insurers, private wealth funds, and non-bank intermediaries.
• Regulatory Shifts: Post-crisis regulations (e.g., Basel III, LCR) pushed banks to reduce Treasury holdings, allowing other, less regulated entities to fill the gap.
• Opacity and Shadow Banking: A growing part of Treasury demand now originates from shadow banks, SPVs, and other entities that do not show up cleanly in traditional data, blurring the line between official and private sector holdings.
• In short: "The growing 'Others' share is a mirror of financial market fragmentation and the silent emergence of a more opaque Treasury demand structure."
• This structural shift may not attract much attention today. But in periods of stress — when liquidity is tested — the resilience (or fragility) of this new holder structure could become critical.

Analysis: Stability or Instability?

To evaluate in how far the recent shifts in the ownership structure represent a deterioration in the ownership structure, I am now classifying the different categories in either “unstable”, “stable” or “neutral”. In this overview, I have classified the Federal Reserve under “unstable”, because if a central bank holds significant amount of own country debt – in particular sovereign debt, this is a clear sign, that it struggles to place that debt in the public capital market at the current yield. Alternatively, you could argue, that if the Treasury would place that debt in the public / private markets, yields would soar / the interest rate curve would shift upwards. As is detrimental to the health of the economy, it cannot be done.  

Classification of U.S. Treasury Holders by Stability

What this chart shows:

The stable investor base has somewhat decreased. From more than 80% to slightly above 60%. If you sort China into the unstable holders, you are already under 60%.

  Structural Shift: Since 2008, the share of stable holders of U.S. Treasuries has gradually declined, while unstable and neutral holders have grown.

  Crisis Sensitivity: During major crises (Global Financial Crisis 2008, COVID shock 2020), the share of unstable holders (Fed interventions, Hedge Funds) spiked sharply, absorbing market slack.

  Systemic Implication: A larger share of Treasuries is now held by entities whose willingness to hold debt is either conditional, leveraged, or policy-driven — making the overall system more fragile under stress.

Conclusion

No Imminent Default — But Real Risks

• U.S. debt is denominated in its own currency.
• Hence, no direct insolvency risk, but...
• Risks of inflation, credibility loss, and dollar devaluation.
• Political instability and market turbulence could escalate.

The U.S. Treasury market is not about to implode — but it has become more fragile. As we move deeper into a world of structural fiscal deficits, evolving market participants, and short-term refinancing needs, the "safe asset" may behave less safely under stress.

In the next post, I will look into the term structure and interest rate term structures to evaluate the potential for a “financial calamity to happen” as Bessent admitted in the interview with Tucker Carlson.

The powder keg exists. Ignoring it would be a mistake.

Sources:

• U.S. Treasury Monthly Statements
• CBO Projections 2025
• Federal Reserve Z.1 Financial Accounts
• IMF, World Economic Outlook Database April 2024

[1] Attribution Methodology: Holdings by Hedge Funds include Cayman Islands and offshore jurisdictions. "Foreign (ex China & Japan)" includes all other foreign holders except China and Japan. China and Japan are shown separately due to their clear official holdings at sovereign level. "Others" captures unidentified offshore, financial intermediaries, smaller institutions, and pensions.