America’s $40 trillion national debt isn’t just making borrowing more expensive — it might also be helping Washington’s biggest geopolitical rival.
On Aug. 19, the Treasury Department announced that the national debt had surpassed $40 trillion, marking a new milestone. But the bigger story isn’t the number itself — it’s what it signals about Treasury bondholders. Even as the Federal Reserve holds off on raising interest rates, pressure continues to build across the economy. The concern isn’t confined to U.S. borders, either: Chinese government bonds may be quietly emerging as an alternative to American debt in the eyes of global investors.
For years, the United States has been synonymous with growth and prosperity — the market investors turn to for stability. But the war in Iran appears to be shifting that perception, and shifting capital along with it.
This year, interest payments will absorb 13.5% of all federal spending — more than the U.S. spends on defence, and up sharply from 5.2% in 2021. As a result, the government is now paying its highest borrowing costs on 10- and 20-year bonds since 2007 and 2001, respectively.
That trend isn’t fully showing up in inflation data. The U.S. inflation rate has actually eased modestly, falling to 3.4% from 3.5% in June, though it remains above the Fed’s 2% target. But inflation isn’t the biggest concern right now. What unsettles investors is total system debt — public and private combined. When that debt load climbs, investors demand a higher risk premium, pushing up borrowing costs and worsening the very debt dynamics they’re worried about.
A band-aid on the bond market
Treasury Secretary Scott Bessent recently announced that the Treasury would “at least double” its buyback operations for long-dated bonds, raising the maximum size of each operation from about $2 billion to at least $4 billion.
The move was designed to ease bond yields — and briefly, it worked. The 30-year yield dropped roughly 9 basis points, the 10-year eased as well, and stocks rallied. But the relief lasted about a day before yields drifted back to where they started.
The deeper problem is that this is a band-aid, not a fix. Leaning on fiscal dominance can calm the bond market temporarily, but it does nothing to address a rapidly rising debt stock, large structural deficits, and an investor base growing more sensitive to fiscal and inflation risk.
Layered on top is the uncertainty surrounding the Iran conflict — precisely the kind of unresolved risk investors dislike most. And that unease is pushing some investors to look elsewhere for a safer home for their capital. Increasingly, that alternative is China.
The China problem
Unlike most G20 economies, which have been grappling with elevated inflation, China is experiencing the opposite: a sustained deflationary period, largely driven by weak domestic demand.
That pressure traces back to the pandemic. China directed stimulus primarily toward businesses rather than households, unlike most Western economies. When restrictions lifted, Chinese consumers responded by hoarding cash rather than spending it — creating a shortage of buyers for a glut of newly manufactured goods and deepening the deflationary spiral.
From a bond investor’s standpoint, this isn’t purely bad news — it creates an opportunity. Because China has near-zero inflation, the real return on its bonds is unusually stable. A lower nominal yield in a deflationary environment can be worth more, in real terms, than a higher yield in an inflationary one.
Central banks have historically avoided Chinese debt because its yields sit well below U.S. Treasurys. But that calculus may be shifting. The dollar’s share of global foreign-exchange reserves currently sits at around 57%, down from roughly 70% in 2001.
There’s no dramatic shift yet, but the early signals are worth watching. Already, foreign investors appear to be returning to Chinese onshore yuan bonds. In May 2026, their holdings increased by 90 billion yuan to 3.21 trillion yuan, about $475 billion — the first increase since April 2025.
A Reuters report from June 15 noted that global asset managers have been adding Chinese government bonds to their portfolios, partly in response to the Iran war. Meanwhile, the dollar’s reserve share fell to 56.77% in the fourth quarter of 2025, its lowest level since 1995, while the renminbi’s share edged up to 1.95%.
KEVIN WARSH JUST CHALLENGED THE FED’S ARTIFICIAL SPEED LIMIT ON US GROWTH
The bigger picture
Taken together, this should serve as a warning for the U.S. around consistency and long-term economic credibility, as a growing list of factors nudges investment elsewhere. It’s also worth noting that this isn’t a uniquely American problem. Debt levels are climbing across the G20: Australia recently passed $1 trillion in debt, two decades after John Howard cleared the country’s national debt in 2006, while Britain crossed $4 trillion this same August.
Still, the U.S. conflict with Iran stands out as a central driver of elevated bond yields right now. And heading into the midterm elections, the economy is likely to remain the top issue for voters. President Donald Trump’s promises around jobs and manufacturing have delivered tangible opportunities within America, and that’s what has to be the focus going forward. His economic standing may hinge less on selling specific policies than on projecting a credible vision — one centered not just on cutting government waste, but on a concrete plan to reduce federal spending overall.
William Nye is a Brisbane-based Australian student and columnist who writes about politics, culture, economics, and international affairs shaping Australia, the U.S., and the wider Western world. His work has appeared in the Spectator Australia and the Washington Examiner.