What measures does the U.S. have to reduce the deficit while maintaining U.S. Treasury bonds?

The enormous debt has become an "unbearable burden" for the U.S. government, and reducing the deficit has become urgent. Among the priorities is controlling U.S. Treasury yields to reduce interest expenses. However, a decline in yields will directly affect the demand for U.S. Treasuries from overseas "big investors," which in turn pushes yields higher.

With the need to reduce the deficit while maintaining U.S. Treasuries, what other options does the U.S. government have?

In a report on March 31, Barclays proposed several countermeasures, including government spending cuts, stabilizing Treasury supply by the Treasury Department, and encouraging domestic banks in the U.S. to purchase Treasuries, in order to stabilize yields and maintain demand for U.S. Treasuries.

Overseas Demand for U.S. Treasuries Becomes a Challenge

Foreign investors have long been the main buyers of U.S. fixed-income securities. In recent years, foreign investors have purchased nearly $1 trillion in long-term fixed-income securities annually, with about half being U.S. Treasuries. As of December 2024, foreign investors held approximately $13 trillion in U.S. long-term fixed-income debt, of which $7 trillion is U.S. Treasuries, accounting for about 33% of outstanding Treasuries.

However, due to recent increases in U.S. import tariffs and other countries implementing fiscal easing policies, the outlook for foreign demand for U.S. assets has dimmed, which may lead to a decline in the U.S. current account balance, thereby weakening foreign demand for U.S. assets.

The purchasing volume of U.S. debt securities (Treasuries, agency bonds, municipal bonds, and corporate bonds) by foreign investors is closely related to the U.S. current account deficit.

According to IMF forecasts, the U.S. current account deficit is expected to gradually shrink, from $950 billion in 2024 to $750 billion in 2029, with the ratio to GDP decreasing from 3.25% to 2%. Fiscal expansions in countries like Germany may also lead to savings remaining domestically, reducing exports to overseas.

If foreign investors reduce their purchases, domestic investors will need to fill this gap, which typically leads to an increase in term premiums, thereby pushing overall yields higher. The report indicates that a 1 percentage point annual decrease in foreign demand could lead to a 30-35 basis point increase in yields.

"Multiple Approaches" to Control U.S. Treasury Yields

Despite the potential decline in overseas demand, Barclays believes there are several ways to alleviate the upward pressure on U.S. Treasury yields:

• Fiscal Measures: If the U.S. Congress implements spending cuts and increases tariff revenues, the fiscal deficit may decrease. For example, if Congress enacts the proposed $2 trillion in mandatory spending cuts, the budget deficit could be reduced by 0.5 percentage points by the end of 2028.
• Stabilizing Supply: The U.S. Treasury Department can stabilize supply by maintaining the scale of note and bond auctions for an extended period. U.S. Treasury Secretary Janet Yellen has stated that there will be no changes to the bond issuance plan in the near term, and the debt maturity will be delayed
• Demand-side policy: Regulators are working to encourage banks to purchase U.S. Treasury bonds by readjusting leverage requirements. The report estimates that this could release about $6 trillion in additional leverage exposure, thereby increasing demand for U.S. Treasury bonds.
• Fundamental factors: The current policy mix in the U.S. may lead to a slowdown in economic growth, thereby maintaining demand for safe assets such as U.S. Treasury bonds