TOKYO – For decades, the US enjoyed a remarkable luxury: its two biggest creditors, Japan and China, kept showing up at Treasury auctions with checkbooks open.
Now, Donald Trump’s trade wars, tariff threats and widening geopolitical confrontations raise an uncomfortable question: what happens if Washington’s most reliable bankers decide they’ve had enough?
Granted, global investors have puzzled over this scenario for years. It’s made the dollar-is-doomed trade even more of a widow maker than the Japanese-bond-crash strategy that all too many hedge funds have toyed with. Yet timing is everything, and that led billionaire Ray Dalio to warn this week that Tokyo and Beijing might soon stop financing America’s imbalances.
“The Chinese don’t want to continue to accumulate — there are geopolitical issues as well as economic issues,” Dalio told Bloomberg. “When you have a debtor-creditor relationship and you have an adversary relationship, that’s a very difficult dynamic.” Japan, meanwhile, has entrusted “a lot of money” to US officials that he senses the country now wants to take back.
Debt markets have been spinning out of control in recent months. First, Japanese debt, then US Treasuries and now France. The fiscal chaos in Paris threatens to take out its sixth prime minister in two years as 10-year yields test 2011 lows. Eurozone bond spreads are widening amid “higher sovereign default risk in France,” Macquarie Bank’s Thierry Wizman can’t help but ask: “Are the French Toast?”
Brookings Institution economist Robin Brooks notes that “government bond yields in France are spiraling out of control. Contagion to the rest of high-debt Europe is unfolding rapidly.”
None of this contagion talk is happening in a vacuum. The Iran war-related inflation surge is putting a spotlight on governments living further beyond their means than at any time since the 2008 global financial crisis.
Here, the specter of the US and the euro engaging in a race to the bottom couldn’t be more poorly timed. Never mind that the US Federal Reserve and European Central Bank are in tightening mode. Currency traders smell financial cracks developing on both sides of the Atlantic.
The artificial intelligence boom is adding additional jet fuel to debt market leverage. AI-related infrastructure spending catalyzed a massive debt binge across sectors to finance data centers and power grids. Leading tech “hyperscalers” decided to race beyond free cash flow and go big on debt issuance all at the same time. It’s just one of many bills now coming due as geopolitics go awry in unpredictable ways.
“Before, they would raise equity and now they need to come to debt,” Dalio said, warning several factors could cause the AI bubble to burst. “Something like a wealth tax would have that effect, or having to pay back loans.”
Dalio’s concern about demand for US Treasuries would seem hyperbolic if not for Washington’s national debt topping US$40 trillion or Donald Trump trying to cajole the Fed to cut, not raise, interest rates. And if not for US Treasury Secretary Scott Bessent pressuring the Bank of Japan to accelerate rate hikes, putting him at odds with Prime Minister Sanae Takaichi and her finance minister, Satsuki Katayama.
Though Team Takaichi has been circumspect in public, officials here are aghast at Bessent last month claiming “I am the house now” thanks to “asymmetric information” about Japan’s plans for the yen. In a rare moment of candor, Katayama called his comments “scary.”
Trump, meanwhile, turned many Japanese heads with a decidedly chummy September summit with Chinese leader Xi Jinping — with zero regard for Tokyo’s concerns and priorities.
The US literally rolled out the red carpet for Xi. Trump even met him on the tarmac, the first such gesture by a US president since 1962. All Japan, America’s top banker with $1.1 trillion of US Treasury holdings, can do now is watch and hope Trump and Xi don’t sign a “grand bargain” trade deal that excludes it.
There’s also the $550 billion “signing bonus” Trump demanded from Japan in exchange for a lower tariff rate. Reports suggest that Trump is frustrated that Tokyo is moving slowly to deploy the titanically large pile of money he wants Tokyo to invest in the US. Naturally, Takaichi’s Liberal Democratic Party hopes to wait Trump out, knowing that any investments it disburses could blow up on its domestic approval ratings.
Of course, both Tokyo and Beijing – which holds $618 billion of Treasuries, down from a 2013 peak of $1.32 trillion – have legitimate reasons to worry about the safety of the national savings they’ve entrusted to the US. Since the days of the 2008 “Lehman shock,” China has raised concerns about the safety of US Treasuries.
In 2009, then-Chinese Premier Wen Jiabao’s literally pleaded with the US to protect its AAA credit status. “We have made a huge amount of loans to the United States,” Wen said at the time. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.” Wen implored the US to “honor its words, stay a credible nation and ensure the safety of Chinese assets.”
Since then, the US has lost all three of its AAAs. First, S&P Global downgraded Washington to AA+ in 2011, prompted state news agency Xinhua to scold the US over its “addiction to debt.” Then Fitch downgraded it in 2023, followed by Moody’s in 2025. Since then, China has been busy trimming its dollar exposure.
China is hardly alone. Brazil, Switzerland and Norway’s sovereign wealth fund have also been pruning their dollar holdings. Japan, too, which sure has gotten Bessent’s attention. Bessent’s late-July decision to intervene jointly with Tokyo to boost the yen was largely aimed at dissuading Tokyo from selling US Treasuries. So much so that Bessent’s team sold euros, not dollars, to fund the yen purchases.
The last thing the global financial system needs in the homestretch of 2026 is a fire sale on US government debt. Wall Street spends endless hours obsessing over Fed policy, inflation and budget deficits. Yet the biggest threat hanging over the $29 trillion Treasury market is Japan and/or China either selling or buying fewer US government bonds just as Washington needs ever more financing.
“When you have a debtor-creditor relationship and you have an adversary relationship, that’s a very difficult dynamic,” Dalio said.
This isn’t the first time Dalio has ruined Bessent’s day. In June, for example, Dalio warned the US is “past the point of no return” on debt and warned of a major crisis within three years. “It’s not just the fiscal deficit of the government, it is also the AI and other large expenditures,” Dalio said. Foreign lenders are “starting to get squeezed.” Dalio added: “So where does that saving come from? That comes from those sources which are tightening.”
Bessent had many investors rolling their eyes recently when he said he soon would be “bending the curve” on federal borrowing. His Treasury buyback plan failed to stop US Treasury yields from rising to 24-year highs (currently at 5.28%). Meanwhile, the yen isn’t surging and oil prices are falling — two more examples of markets calling Bessent’s bluff.
Famed “bond king” Bill Gross hardly seems to be falling in line. In a September 30 op-ed for the Financial Times, Gross, co-founder of Pacific Investment Management Company (PIMCO), offered clear advice to investors: “Don’t own bonds.”
Gross is worried about US debt—government, mortgage and corporate—now totaling roughly $84 trillion. “Too much debt can lead to too much risk,” he argues.
That Washington’s debt is now 100% of GDP — which Gross calls a “peacetime high” — is particularly worrisome. He warns it’s contributing to higher inflation in ways that could slow the globe’s biggest economy. Never mind what the Iran war that Trump started in February and increasingly looks like another US “forever war” might do to America’s already stretched finances.
America’s fiscal model only works when someone is willing to keep extending credit. For years, China and Japan have been the most important cardholders. As Trump trolls US friends and foes alike with tariffs, economic nationalism and foreign wars no one asked for, Washington could soon learn the high cost of antagonizing your creditors.
Hence concerns about the next round of “bond vigilantes” to take on the Trump White House that have made him blink: Asian central banks.
Central banks in this region hold roughly $2.5 trillion of Treasuries, with Japan and China sitting on a combined $1.7 trillion. If they were to stop buying, who could pick up the slack? Arguably no one, though reports indicate the UK has recently upped its holdings.
That’s why chatter in bond trading pits that Japan, China and other Asian monetary authorities might be selling — or just slowing purchases — so alarms top Treasury officials.
Bessent understands the risk well from years working in hedge fund circles. For all Trump’s public bluster, another Long-Term Capital Management-like crash would be catastrophic for the US and global markets.
LTCM’s 1998 spectacular implosion was partly due to surging Treasury debt yields. Triggering a repeat in 2026, with Trump’s tariffs upending all asset classes and China flirting with deflation, could make the 2008 crisis look tame by comparison.
The risk that Trump’s policies might repel Asian central banks is growing. This threat is imparting a unique leverage point for the Bank of Japan, the People’s Bank of China and other top Asian monetary authorities.
Asia’s main leverage over Washington right now is bonds, currencies and services trade. This latter piece refers to America’s deep dependence on Asian markets for financial services, technology and intellectual property. The mechanics of Trump’s trade war suggest an imperfect understanding of the US economy’s Asia-related vulnerabilities.
Bond traders, the kinds that take matters into their own hands when a government’s policy mix seems out of whack, seem to be losing faith in the Trump-Bessent tag team. If Asia’s central banks do as well, look out below.
Follow William Pesek on X at @William Pesek.
