Japan & China slashing US sovereign debt is Washington's worst nightmare

Published time: 17 Aug, 2018 11:02Edited time: 17 Aug, 2018 11:06

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Latest figures from the US Treasury Department show that Russia and Turkey are not the only countries to dump US debt bonds. Washington’s second-biggest creditor, Japan, is doing the same.

Tokyo dumped $82.9 billion, or seven percent of its US Treasuries holdings, over the twelve months ending in June - the latest month for which data is available.

In June alone, the country sold off $18.4 billion worth of the US securities. Japan’s holding as of June totals $1.03 trillion, the lowest since October 2011, though the country still remains the second-biggest holder of US debt.

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Turkey follows Russia in dumping US Treasury securities

China, the biggest holder of the US sovereign debt at $1.178 trillion, sold $4.4 billion worth of the US bonds in June. Since October 2011, China’s share of US Treasuries has declined by $138 billion. A fairly insignificant amount, but the escalating trade conflict with Washington could prompt Beijing to start massively dumping its holdings. The move could spell disaster for the US financial system.

Liquidating US Treasuries, one of the world's safest and most actively-traded financial assets, has recently become a trend among major holders. Russia dumped 84 percent of its holdings this year, with its remaining holdings as of June totaling just $14.9 billion. With relations between Moscow and Washington at their lowest point in decades, the Central Bank of Russia explained the decision was based on financial, economic and geopolitical risks.

At the same time, Turkey fell off the list of major foreign holders of US government securities by slashing its share of US bonds and notes to $28.8 billion in June from $32.6 billion in May. Turkey’s holding of US Treasuries has fallen by 42 percent during the first half of the year.

Ankara and Washington are in a diplomatic standoff over the detention of US pastor Andrew Brunson in Turkey. Brunson has been charged with assisting the failed military coup two years ago. He faces 35 years in a Turkish prison.

A treasury bond is a fixed-interest government debt security with a maturity of more than 10 years. Treasury bonds make interest payments two times a year. Financial instruments such as government bonds are vital for countries that are used to living on credit. US Treasuries are critical to the US government's ability to borrow money to balance the budget.