After U.S. debt soared to $38 trillion, the ‘easy times’ are now over as hedge funds jump into the bond market, former Treasury official warns

Core Viewpoint - The shift in U.S. debt holders from foreign governments to profit-driven private investors poses risks to the stability of the U.S. financial system during market stress [1][2]. Group 1: Changes in Treasury Holdings - Foreign governments represented over 40% of Treasury holdings in the early 2010s, a significant increase from just over 10% in the mid-1990s [2]. - Currently, foreign governments hold less than 15% of the overall Treasury market, despite maintaining similar absolute holdings as 15 years ago [2]. - The total U.S. debt has surpassed $38 trillion, but foreign governments have not increased their Treasury purchases in line with this surge [2]. Group 2: Role of Private Investors - Private investors have filled the gap left by foreign governments, but they are more likely to demand higher returns, leading to increased volatility in rates [3]. - Hedge funds have doubled their presence in the Treasury market over the last four years, raising concerns among U.S. officials [3]. - The Cayman Islands now hold the largest share of U.S. debt outside the country, primarily due to hedge fund activities [3]. Group 3: Market Turbulence and Predictions - Recent shocks in the Treasury market, traditionally a safe haven, have been attributed to hedge fund activities, including a selloff following President Trump's tariffs [4]. - Relying on artificial productivity gains or inflation to manage U.S. debt is predicted to backfire [4]. - A credible plan to control deficits and manage debt is deemed necessary to satisfy bond investors, referred to as "bond vigilantes" [5]. Group 4: Influence of Bond Vigilantes - The upheaval in the bond market following Trump's tariff announcement influenced his decision to moderate aggressive rate policies [6]. - The term "bond vigilantes" highlights the power bond investors have to compel lawmakers to change fiscal policies [5][6].