Taiwan Warns of US Debt Impact on Treasury Bonds

Taiwan’s central bank issued a stark warning on Saturday, highlighting the growing concerns over the United States' mounting debt and its impact on the trust in US Treasury bonds. Governor Yang Chin-long emphasized that the US's expanding budget, coupled with the economic policies of Donald Trump, is eroding confidence in the stability of US sovereign debt. With over 80% of Taiwan’s $593 billion in foreign reserves invested in US Treasuries, the region is particularly vulnerable to any shifts in the US bond market.

Yang’s comments come at a critical juncture as the US increasingly relies on global investors to finance its spending. He criticized Trump’s trade policies and his frequent attacks on the Federal Reserve, stating that these actions are deterring investors from holding US Treasury bonds. Yang specifically mentioned Trump’s “One Big Beautiful Bill Act,” which he believes could lead to a rapid increase in debt levels, further threatening future confidence in US bonds.

Trump’s tax cuts and tariffs have also raised significant concerns. Yang noted that Trump’s budget could result in a $2.8 trillion increase in the federal deficit over the next decade, according to projections from the Congressional Budget Office. This fiscal expansion, while expected to provide short-term economic benefits, poses long-term risks for countries like Taiwan, which have substantial investments in US bonds.

Trump’s trade policies, including the imposition of wide-reaching tariffs on multiple countries, have also drawn attention. Although the tariffs were paused for 90 days in April to facilitate negotiations, Yang argued that this approach does not address the underlying structural problems in US trade. He warned that these policies could negatively impact the US economy and further affect global trade and economic outlook.

Yang’s warnings underscore the potential erosion of trust in the international system built around the US dollar and American credit. This system relies on the belief that the US will always repay its debts. However, with current policies, that trust is beginning to waver.

The growing skepticism is reflected in recent data. Holdings of US assets by over 200 central banks and sovereign wealth funds at the New York Federal Reserve decreased by $17 billion last week, totaling $48 billion since late March. This decline coincides with the implementation of Trump’s tariff strategy, which has unsettled the bond market. Foreign buyers currently account for 30% of the US Treasury market, making their reduced appetite for US debt a significant concern.

Despite the recent selloff, overall foreign holdings of US Treasuries reached a record $9.05 trillion in March, marking a 12% increase from the previous year. However, this data predates the April market turmoil. The next set of figures, to be released by the Treasury Department, will provide a clearer picture of the extent of the selloff.

Typically, after selling Treasuries, foreign banks store the cash in the New York Fed’s reverse repurchase facility, using Treasuries as collateral. However, since March, the use of this facility by foreign institutions has decreased by $15 billion. Combined with other factors, this indicates that US assets held by foreigners at the Fed have declined by approximately $63 billion in just two months.

While Yang did not suggest an imminent collapse of the dollar’s reserve status, he acknowledged the potential risks. Taiwan’s central bank continues to view US bonds as “sound” and does not currently express concerns about the dollar’s global role. Nevertheless, the underlying message is clear: if the US continues to accumulate debt while engaging in aggressive trade policies and attacking the Federal Reserve, major investors like Taiwan may reconsider the risks associated with holding US bonds.