US Debt Nears $40 Trillion: Can RMB Assets Serve as a Safe Haven Amid the Global Treasury Storm? Three Key Drivers Explained

Although the US Treasury Department suddenly announced this Wednesday that it would increase the scale of long-term bond buybacks in an attempt to lower long-term yields through a "borrow-short, repay-long" strategy, the effect lasted only one day. The 30-year US Treasury yield rose again to 5.249%, approaching its recent high.

US Treasuries were once regarded by international capital as the safest investment vehicle, with sovereign wealth funds around the world scrambling to allocate them. In March 2020, the 30-year Treasury yield once hit 0.7%. The rise in long-term US Treasury yields is seen as an early warning of the country's fiscal health. The simultaneous surge in gold and long-term US Treasury yields signals that the US dollar is facing an erosion of trust.

With US Treasuries flashing warning signs and long-term yields staying elevated, funding costs are becoming more expensive. From a global perspective, geopolitical conflicts, de-globalization trends, and higher capital costs mean the world is entering an era of high-cost production. Under such pressure, the economy with massive production scale and extreme cost-control capabilities will see its currency and assets appreciate. The RMB central parity rate against the US dollar has risen to its highest level in three and a half years—this is the vote of forward-looking capital.

In stark contrast to the trust crisis facing the US dollar and the bubble in dollar-denominated assets, the RMB is occupying an increasingly large share in global trade settlement and foreign-exchange reserves. China's 10-year government bond yield stands at just 1.68%, while A-shares feature a manufacturing-heavy profile and overall valuations that remain at low levels.

Currency strength, low valuations, and ample policy room mean that the future trajectory of A-shares will be independent of the US Treasury storm.

The World Enters an Era of High-Cost Production

This week, the 30-year US Treasury yield broke above the 5.3% threshold. This was not driven by economic growth, but by the fact that US federal debt has reached $40 trillion, widening cracks in dollar confidence, reduced allocation willingness among major global central banks, and more rate-sensitive private capital becoming the primary buyer. US Treasuries must offer higher yields to attract buyers.

US Treasuries were once regarded by international capital as the safest investment vehicle, with sovereign wealth funds scrambling to allocate them, driving long-term yields to extremely low levels. For instance, during the COVID-19 pandemic in 2020, the bid yield for 30-year US Treasuries dropped as low as 1.32%. Yet in the latest auction last week, the 30-year Treasury bid yield reached 5.216%, surpassing levels seen in mid-August 2007 on the eve of the subprime mortgage crisis.

A country's rising long-term bond yields are viewed as a warning of its fiscal condition. In mid-August 2007, on the eve of the US subprime crisis, the 30-year Treasury bid yield hit 5.059%. Back then, however, US federal debt was only $5 trillion, and annual net interest payments were just $238 billion. But after the subprime rescue and massive fiscal stimulus during the pandemic, US federal debt has now soared to $40 trillion.

Currently, net interest payments on US government debt already account for one-fifth of fiscal revenue, creating a negative self-reinforcing cycle where interest expenses drive deficits. Olli Manlinen, a scholar at the University of Helsinki, recently noted that when the refinancing rate persistently exceeds GDP growth, combined with ongoing primary fiscal deficits, the debt-to-GDP ratio will automatically rise. If political gridlock makes fiscal spending cuts impossible, the only remaining path is debt monetization—resuming large-scale bond purchases to suppress yields—but the long-term cost is erosion of dollar confidence.