ELI5: How does a country selling their stockpiled US treasury bonds impact the United States negatively if they are selling the bonds to another buyer?
ELI5: How does a country selling their stockpiled US treasury bonds impact the United States negatively if they are selling the bonds to another buyer?
Comments
It wouldn’t affect the US directly but could reduce demand for new bonds, which would require those new bonds to be sold at a higher interest rate to compete. That will indirectly cost the US government more as long as the market is flooded with those previously held bonds.
Imagine in 2023 you asked your friends if they wanted to lend you money and 100 of them said yes and you issued bonds to them.
In 2024 tons of people are trying to buy the 2023 bonds so they are really popular.
So in 2024 you do it again, your friends see how so many people have been wanting to buy their old bonds that they say yes again and for even less interest.
Now in 2025 you fuck up and make some bad decisions, your friends are worried you won’t pay soon and the others are too, everyone wants to get rid of them and now they’re sold for almost nothing.
So far that’s not a problem that actually affected you but say in 2026 you issue new ones, do you think your friends will rush to buy them from you at the same conditions when they could just buy the old ones for almost nothing and they know they won’t be able to sell them for much either?
People who own bonds go underwater as rates increase. This puts pressure on banks and other institutions holding treasuries
It depends how many they sell.
A bond is basically a loan from investor to the government, that the government promises to pay back with interest (paid twice a year usually). It’s one way the government raises money.
The bonds can then be traded on the open market, selling for a given price that reflects both the value of the bond and the interest over time and the expected amount of inflation (more inflation makes the bond worth less since the value is typically fixed when issued).
When the government wants to raise money, it sells bonds. The higher the interest rate, the more attractive the bond, but also the more expensive for the government.
People who hold bonds will tend to buy new ones to replace them when they mature.
But when a big country sells a lot of bonds, it can lower the price (higher supply). It can then make newer bonds less appealing (since there’s a glut of cheap ones) meaning the government either doesn’t raise as much money or it has to raise interest rates to compete.
It also can be a sign that the bonds are becoming riskier to hold – there are some rumours that the US might not honor the bonds. If that rumour takes hold because major players are selling bonds, then you can expect even more to sell and crash the price further. And not paying them back would tank the US’ ability to actually raise money through bonds.
So between increased cost of borrowing and potentially lower confidence in the US government, a big country selling off a lot of its US bonds could be bad
In ELI5 terms, there is only so much demand for bonds at the current price. If you want to sell a bunch of bonds that exceeds this amount of demand, you need to make the price cheaper to attract more buyers. The way bonds work, the cheaper the price, the higher the yield.
For our purposes here, the yield corresponds to the interest rate paid on the bond
So, the idea is to flood the market with bonds, decrease their prices, increase yields. “Move the market” so to speak.
In other words, the idea is to make it more expensive for the USA to issue new debt (which is something we do constantly, rolling over old debt, etc)