Due to the rapid deterioration of US debt issues, discussions in the market about US debt risks have noticeably heated up.
Everyone knows that US national debt is as high as 39 trillion dollars. But who is the true largest buyer of US Treasury bonds?
The result might surprise some people. Currently, the largest foreign holder of US debt is not the UK, nor China or Japan, but surprisingly the Cayman Islands!
However, it is not the sovereign nation of the Cayman Islands buying large amounts of US debt; rather, it's because many hedge funds register their companies there due to lower taxes and looser regulations, making it convenient for business.
《Regarding the situation of sovereign nations holding the most US debt,you can refer to this article.》
And these funds have been frantically buying US Treasury bonds in recent years; to what extent?
From 22 to 24, of the new US government bonds issued, as high as 37% were bought by these Cayman-registered funds. In other words, of the new money the US has borrowed in recent years, nearly more than one-third has been taken by these funds.
Although TIC official data shows that the Cayman Islands directly hold about 300 billion to 400 billion dollars in US debt, the actual holding amount (global hedge funds & offshore tax haven funds) may be as high as 1.85 trillion dollars, more than traditional major buyers like China, Japan, and the UK.
Why are they buying so much?
These funds are not really optimistic about the US economy and want to hold Treasury bonds long-term. Instead, it's because they are doing 'basis trade'. This is a type of arbitrage trading. Simply put:
1️⃣ Funds use borrowed money to buy large amounts of US Treasury bonds (spot).
2️⃣ Simultaneously sell corresponding Treasury bond futures in the futures market.
3️⃣ Spot and futures prices are usually very close, but there is a small price difference (basis).
These funds profit from this small difference (usually only a few basis points).
Sounds like nothing? But the key is—they use very high leverage.
Imagine: you only put up 1 dollar of capital, but borrow 20, 30, or even more times that amount to buy things. As soon as the market has a slight fluctuation, the bank or counterparty calls in the margin, you might be forced to sell all the Treasury bonds at once.
What is the problem with this?
The US government has about 10 trillion dollars in old Treasury bonds maturing in the next year, needing to issue new debt to repay. Such a large amount should originally be bought long-term and stably by sovereign nations like China and Japan for the market to feel more secure. But now, it's mainly these high-leverage hedge funds supporting the scene.
The problem is here:
➤ These funds are not 'long-term investors'; they are 'short-term arbitrage players'.
➤ If the market experiences a big fluctuation (for example, interest rates suddenly rise sharply, stock market crashes, or banks unwilling to continue lending to them), they will collectively ' unwind positions' (quickly sell Treasury bonds).
➤ The result is: a large amount of Treasury bonds flood the market for sale, Treasury bond prices will fall, and the US government's borrowing cost (that is, interest rates) will rise.
➤ This could make it more expensive for the US government to repay debt and might also affect global financial markets.
Currently, Wall Street and the macro investment community are closely monitoring this. The concern is not that something will happen tomorrow, but in the long term, with the US having such a huge debt, if it increasingly relies on high-leverage and volatile funds to support it, the stability is indeed very worrisome.