Concerns over US fiscal sustainability are gaining renewed attention in global markets, with a growing focus on funding dynamics rather than outright selling of US assets. A recent warning from a senior adviser connected to the People’s Bank of China highlighted the risks posed by rising US deficits and increased debt issuance. The adviser cautioned that these factors could undermine confidence among global investors, especially amid heightened geopolitical tensions and trade frictions that are reshaping capital flows. The core message was that the US’s ongoing dependence on external funding makes it vulnerable to shifts in global demand for dollar-denominated assets.
Supporting this perspective, new analysis from UBS challenges the common narrative of “sell US” trades as the main threat. UBS emphasises that fiscal crises rarely result from mass selling of government debt. Instead, the real danger lies in the reduction or sudden withdrawal of marginal buyers who fund ongoing deficits. In other words, the problem is not bond sell-offs themselves but a drying up of funding inflows, which leads to higher borrowing costs and a loss of confidence.
Historical examples reinforce this distinction. The UK gilt crisis in 2022 and Greece’s sovereign debt crisis a decade earlier were not caused by large-scale liquidation of bonds. Rather, these crises emerged when investors stopped rolling over debt or purchasing new issuances at prevailing yields, causing sharp increases in borrowing costs and triggering policy upheavals.
This funding vulnerability is particularly relevant for the United States. Unlike Japan—which finances much of its government debt through domestic savings—US fiscal deficits depend heavily on foreign capital inflows. A sustained decline in overseas demand, whether due to political risks, concerns over long-term debt trajectories, or portfolio shifts, could push US yields higher even if current holders of US debt do not actively sell.
In contrast, Japan’s debt is largely financed domestically, providing it with greater protection against sudden changes in global funding sentiment despite having a high debt-to-GDP ratio. This difference explains why economies relying on external financing may experience sharper market stress when funding conditions deteriorate.
Taken together, the warnings from the PBOC adviser and UBS analysis underscore a key truth: risks to fiscal sustainability arise when confidence in future funding weakens. For forex traders, the critical issue is not an immediate sell-off in US government bonds but whether global investors will continue to finance growing US deficits at reasonable costs. This question is becoming increasingly important as US debt issuance expands and global financial conditions tighten.
While these risks merit attention, markets remain far from a crisis scenario at present.
Original Source: Eamonn Sheridan of investinglive.com
