When yield matters after all

If US Treasury Secretary Scott Bessent really wanted to draw attention to the spiralling US debt, he couldn’t have made a better move than buying back more long-dated Treasuries. To the extent that this was intended to bring down yields, I can’t help thinking that fighting the market this way is best described as hare-brained. To nobody’s surprise, the effect was reversed within a day.

Additionally, with the US government debt reaching the $40 trillion threshold, no wonder interest rates were the talk of the town in August.

Let’s take a closer look at this debt. As of December 2025 – the latest date with complete figures – 35% was owned by the Federal Reserve and US government entities. A further 24% was owned by foreign investors, with a similar share owned by various financial institutions and mutual funds. Other investors ticked in at 17%. This is a residual category that includes individuals, trusts, non-financial corporations and more. I suspect hedge funds are included here too.

This structure has changed considerably over the years. In 2010, the former category owned as much as 45%, while foreign investors stood at 32%. In addition, Treasury data indicate that the lion’s share of the latter percentage was foreign official holdings, like currency reserves, while that’s likely the case for just over half of these foreign holdings in 2025.

If you had the patience to follow through thus far, here’s why I cared to detail these figures: In 2010, a majority of US Treasuries – perhaps as much as 75% – was held by investors who were generally insensitive to prices or yields. They held Treasuries for other reasons. In 2025, this share may have fallen below 50%. In other words, the share of yield-sensitive investors may have more than doubled – while the debt has almost tripled.

I’ve written quite a bit about the growth of price-inelastic demand for stocks. Ironic, then, that the demand for Treasuries has moved in the opposite direction.

On top of this, we have the shrinking confidence yield – the reduction in yield due to the US dollar’s role as the global reserve currency. One may reasonably expect these trends to make financing the US government deficit increasingly expensive.

In August, the market wasn’t really troubled. The yield on 10-year Treasuries rose modestly, from 4.71% to 4.75%. A plausible inference is that this is not an immediate problem or challenge. It may, however, signal non-trivial interest rate risk despite rates having risen significantly during the past few years.

Hence, I’m not bringing this to your attention as a matter of tactical positioning. It’s rather a case of strategic risk management. After all, interest-rate risk is the fixed income version of systematic risk; it cannot be diversified away. And my general advice is laughably simple: invest in bonds or funds with low or limited interest rate risk – i.e. low modified duration.

I can think of a few options there.

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