China Just Walked From Our Debt

Key Points:

Foreign flight to yield spike: Foreign net buying collapses → auction demand thins → long yields rise to pull American money in
Buyer strike deepens: Net foreign Treasury buying fell 88% in one month, from $56.6 billion in May to $6.8 billion in June, with ING reading the same data as a $72 billion net liquidation by foreign holders.
Interest bill threshold: If the 30-year yield holds above 5%, federal interest costs are on track to exceed $1 trillion this fiscal year after already hitting $857 billion in the first nine months, up 13% year over year.
Long bond capitulation: The 30-year Treasury yield climbed to 5.31%, its highest level since June 2007, as China's holdings dropped to their lowest since September 2008.

I keep coming back to one number. Last September was the last time China held this little of our debt. That was the month Lehman Brothers died.

They kept buying through wars. Through crises. Through three presidents. But this June, they walked. So did Japan. So did the UK. Our three biggest customers, all pulling back in the same month.

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You might not think this touches you. It touches almost everything you own.

The Treasury Department slipped out June's numbers Monday afternoon. Net foreign buying of our debt fell from $56.6 billion in May to $6.8 billion in June. That's an 88% drop in one month. A firm called ING read the same data and said foreigners actually dumped a net $72 billion.

I get why nobody's talking about it. The report came out on a slow August Monday. Stocks were busy chasing something else. The cable news guys barely blinked.

But I can't stop thinking about this.

For thirty years, foreign central banks were the reliable buyer at every Treasury auction. They showed up. They bought whatever we printed. They kept our borrowing costs low. That let Washington run big deficits without much pain at home.

Now they're stepping back. When foreign buyers step back, American savers and pension funds have to eat the debt themselves. To get us to eat it, Washington has to pay us more. That means higher yields on the long bond.

The 30-year Treasury just hit 5.31%. That's the highest since June of 2007. Think about what June 2007 looked like. The housing bubble was still puffing up. Nobody knew what was coming.

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Here's what worries me. Every tick higher on the long bond makes our interest bill worse. That bill already hit $857 billion in the first nine months of this fiscal year. It's up 13% from last year. We now spend more on interest than on Medicare. More than on the whole military.

I don't think most people realize what that means. Every extra dollar in interest is a dollar we can't spend on anything else. Roads. Schools. Social Security checks. Veterans. It's the biggest crowd-out in modern times. It grows every month the long bond stays this high.

This bleeds into your account too. Bond funds in your brokerage keep dropping. Your kids won't see cheap mortgages any time soon. Companies that need to refinance next year will pay more. That eats into the stocks in your 401(k).

Somebody will tell you the Fed can fix this. The Fed cannot fix this. The Fed sets short rates. The long bond belongs to the market. And the market just watched the biggest buyers walk out of the room.

Nobody knows why China moved. Some say it's payback for the tariffs. Others say they need the cash to prop up the yuan. Japan has its own currency mess. The UK is just short of money. The reasons don't really matter. What matters is that the seats at the auction are getting emptier.

Total foreign holdings fell from $9.371 trillion to $9.299 trillion in a single month. That's $72 billion out the door. And nobody in Washington said a word.

I want to be honest with you. I don't know what happens next. Maybe foreign buyers come back in July. Maybe yields ease. Maybe Congress finds religion on the deficit.

But I've been watching this stuff a long time. I've never seen the top three customers walk in the same month. Not once.

That's the number I'll be repeating this week. Foreign buying: down 88% in a single month.

Picture the Treasury auction room. For decades, the front rows were filled with the same faces. Beijing. Tokyo. London. They always raised their paddles. This June, three of those paddles stayed down. In the back of the room, the interest clock just kept ticking. Louder every day.