This article will take Japan's holding of $120 billion in US Treasury bonds as an example to analyze the price decline, yield increase, and profound impact on US finance caused by the dumping of Treasury bonds, revealing the logic and risks behind this financial phenomenon.

Introduction

US Treasury bonds, known as the "safe haven" of the global financial market, are essentially "IOUs" issued by the US government when borrowing from investors. These IOUs promise to repay the principal on a specific date and pay interest at an agreed rate. However, when countries or institutions holding Treasury bonds choose to dump them for various reasons, it triggers a series of market reactions that can affect not only the US but also the global economy.

This article will take Japan's holding of $120 billion in US Treasury bonds as an example to analyze the price decline, yield increase, and profound impact on US finance caused by the dumping of Treasury bonds, revealing the logic and risks behind this financial phenomenon.

I. The Nature and Market Mechanism of US Treasury Bonds

From price decline to fiscal dilemma, the domino effect of US Treasury dumping

US Treasury bonds are debt instruments issued by the US Treasury Department to cover fiscal deficits or support government expenditures. Each Treasury bond clearly indicates the face value, maturity date, and interest rate. For example, a Treasury bond with a face value of $100, an annual interest rate of 3%, and maturing in one year means that the holder will receive $100 principal plus $3 in interest, totaling $103. This low-risk characteristic makes US Treasury bonds a favorite among global investors, especially countries like Japan, holding up to $120 billion.

However, Treasury bonds are not only held until maturity. Investors can sell them on the secondary market to exchange for cash. The trading price of Treasury bonds is affected by market supply and demand: when demand is strong, prices rise; when supply is excessive, prices fall. Price fluctuations directly affect the yield of Treasury bonds, forming the core of market dynamics.

II. Hypothetical Scenario of Japan Dumping Treasury Bonds

Suppose Japan decides to dump some US Treasury bonds due to economic needs (such as stimulating domestic consumption or dealing with exchange rate pressure), pushing a large amount of "IOUs" into the market. According to the principle of supply and demand, the sudden increase in the supply of Treasury bonds on the market will cause investors to bid lower prices for each bond. For instance, a Treasury bond originally valued at $100 may only sell for $90.

This price decline significantly changes the yield of Treasury bonds. Continuing with the example of a $100 face value, 3% annual interest rate, and maturing in one year with a total of $103:

Normal situation: Investors pay $100 to purchase, maturing to receive $103, with a yield of 3% ($3 interest ÷ $100 principal).

After dumping: If the market price falls to $90, investors buy in at $90, still maturing to receive $103, with a profit of $13, increasing the yield to 14.4% ($13 ÷ $90).

Thus, dumping leads to a decline in Treasury bond prices and an increase in yield. This phenomenon is known in financial markets as the "inverse relationship between bond prices and yields."

III. Direct Consequences of Rising Yields

From price decline to fiscal dilemma, the domino effect of US Treasury dumping

The rise in US bond yields has multi-dimensional impacts on the market and economy. First, it reflects changes in market confidence in US Treasury bonds. A rise in yield means investors demand higher returns to offset risks, possibly due to excessive dumping or increased market concerns about the health of US finance.

More importantly, a rise in yield directly increases the cost of new Treasury issuance. The US government's debt management strategy is often referred to as "rolling over debt" - raising funds by issuing new Treasury bonds to repay maturing old ones. If market yields are maintained at 3%, new Treasury bonds can continue with similar interest rates. But when market yields soar to 14.4%, new Treasury bonds must offer higher interest rates to attract investors, otherwise, there will be no interest.

For example, suppose the US needs to issue $10 billion in new Treasury bonds:

At a 3% yield: Annual interest expenditure is $300 million.

At a 14.4% yield: Annual interest expenditure increases to $1.44 billion.

This difference means an increased financial burden on the US, especially considering the current US debt size has exceeded $33 trillion (as of 2023 data, possibly higher in 2025). The surge in interest expenditure will crowd out other budgets, such as infrastructure, healthcare, or education.

IV. Fiscal Dilemma and the Risk of "Robbing Peter to Pay Paul"

From price decline to fiscal dilemma, the domino effect of US Treasury dumping

The US government's debt cycle relies on low-cost financing. When yields rise and new debt interest rates climb, financial pressure increases sharply. Historically, the US has maintained debt sustainability through "robbing Peter to pay Paul" - borrowing new debt to repay old debt. However, in a high-interest-rate environment, the cost of this strategy inflates rapidly.

Triggered by Japan's dumping, assuming market yields remain high, the US may face the following dilemmas:

Debt snowball effect: High interest rates lead to an increase in the proportion of interest expenditure in the fiscal budget. According to the Congressional Budget Office (CBO) forecast, if interest rates continue to rise, by 2030, interest expenditure may account for more than 20% of the federal budget. This will limit the government's flexibility in economic stimulation or crisis response.

Market confidence shaken: US bonds, as global reserve assets, may trigger investor concerns about US credit ratings due to abnormal yield fluctuations. Although the US has maintained its AAA rating to date, S&P downgraded its rating to AA+ in 2011. Large-scale dumping may exacerbate similar risks.

Monetary policy pressure: The rise in US bond yields may force the Federal Reserve to adjust monetary policy, such as raising the federal funds rate to curb inflation expectations. This will further increase borrowing costs, affecting businesses and consumers.

V. Impact on the Global Economy

From price decline to fiscal dilemma, the domino effect of US Treasury dumping

Japan's dumping of US bonds is not only a US issue but also affects global financial markets:

Dollar exchange rate fluctuations: The rise in US bond yields may increase demand for the dollar, leading to its appreciation. This is unfavorable for export-oriented economies like Japan and may prompt further dumping of US bonds, creating a vicious cycle.

Pressure on emerging markets: Many emerging markets have a significant portion of their debt priced in dollars. An appreciation of the dollar and high interest rates will increase their debt repayment costs, potentially triggering a debt crisis.

Global asset reallocation: A decline in US bond prices may prompt investors to reallocate assets, flowing to other safe assets (such as gold) or high-risk assets (such as stocks), causing market fluctuations.

VI. How to Address the Risk of Dumping?

To mitigate the crisis caused by dumping, the US and the global financial system need to take various measures:

US fiscal reform: By optimizing taxes or cutting expenditures, reduce reliance on debt financing, and strengthen market confidence in US bonds.

International coordination: Major creditors (such as Japan, China) can negotiate with the US to gradually reduce holdings of US bonds, avoiding market volatility.

Federal Reserve intervention: In extreme cases, the Federal Reserve may use quantitative easing (QE) to buy US bonds, stabilizing prices and yields, but this may exacerbate inflation risks.

Diversification of reserves: Global central banks can gradually diversify foreign exchange reserves, reducing reliance on US bonds and spreading the risk of a single asset.

Conclusion

US Treasury bonds are not only the government's "IOUs" but also the cornerstone of the global financial system. The hypothetical scenario of Japan dumping $120 billion in US bonds reveals the delicate and complex balance of the Treasury bond market: dumping leads to price declines, yield increases, further pushing up US fiscal costs, and potentially shaking global economic stability. This chain reaction reminds us that a single country's debt decisions can trigger far-reaching global consequences. In the current context of high debt and high interest rates, countries must carefully manage financial assets to jointly maintain market stability and avoid the debt game of "robbing Peter to pay Paul" evolving into an uncontrollable fiscal dilemma.