01, Debt Ceiling Crisis

As early as 2011, the U.S. government was forced to shut down due to the U.S. debt reaching its debt ceiling.

Now, 11 years have passed, during which the U.S. Congress has raised the debt ceiling multiple times and has also suspended the debt limit, but this risk has never gone away.

After raising the debt ceiling to $31.4 trillion in December 2021, it was unexpected that just one year later in December 2022, the U.S. debt balance once again touched the debt ceiling. However, the U.S. government is finding it difficult to reach a consensus on how to resolve this difficulty.

It is clear that the difficulties faced by the U.S. debt problem are far greater than in 2011.

Because after last year's midterm elections, the U.S. government was divided, with both parties controlling the two houses of Congress. Although both sides currently agree that the U.S. debt issue needs to be addressed, they are also using this as leverage, hoping that the other party will make concessions in other areas. Therefore, the likelihood of the U.S. debt exceeding the limit without a prior agreement is increasing.

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02, China Sells Off Over $200 Billion

Of course, the U.S. media believes that this is just a game of strategy, and an agreement will ultimately be reached before a substantive default occurs. This is because, based on past experience, the U.S. Congress has raised the debt ceiling multiple times, and there should be no difference this time.

However, it is clear that the U.S. media is overly optimistic, as this time is indeed very different from the past.

In the past, U.S. debt has always been a must-have item for many countries' foreign exchange reserves, but now numerous countries are selling off U.S. debt, avoiding it as if it were a plague.This includes China and Japan, the two largest foreign buyers of U.S. Treasury bonds, especially China, which has been resolutely and continuously selling off U.S. debt.

At the end of 2021, China's holdings of U.S. Treasury bonds still exceeded 1,000 billion U.S. dollars, but at the beginning of 2022, with the continuous selling off, the balance of U.S. debt fell below 1,000 billion U.S. dollars for the first time.

The continuous selling off has led to successive breaks below several round numbers, and as of now, it has fallen below 870 billion U.S. dollars.

In less than a year, the cumulative net reduction, calculated by the balance held, has exceeded 210 billion U.S. dollars.

Clearly, China is "calling the bluff" on the United States in this way. With the increasing international status of the renminbi, China no longer needs the U.S. debt you hold to enhance the credit of the renminbi. On the contrary, China is continuously increasing its holdings of gold, believing that a gold-based approach can better enhance the credit of the renminbi.

03, Nuclear bomb-level crisis

It is evident that the troubles with U.S. debt are growing larger.

Last week, the yield on U.S. debt broke through 5% for the first time in 16 years, and it is currently the 6-month term that has surpassed this important threshold, while the one-year U.S. debt is also approaching 5%.

The rise in yields on short-term U.S. debt is significantly faster, which also leads to an increasing inversion between short and long-term maturities.

Moreover, given the current stance of the Federal Reserve, yields are likely to continue to rise. This 31.4 trillion U.S. dollar U.S. Treasury market could potentially trigger a nuclear bomb-level crisis.Recently, various economic data from the United States have been released, showing that inflation has exceeded market expectations. Employment and retail data also indicate that the economy is still overheating. The Federal Reserve has just reduced the interest rate hike to 25 basis points, and it is now very likely that it will increase back to 50 basis points when raising rates in March.

As a result, the rise in U.S. Treasury yields may accelerate, and the risk of a financial blowout has been brought forward.