Debt levels rise, investors question the safe haven status of US Treasuries

US government debt held by the public has hovered close to 100% of GDP since the pandemic. At the same time, price-insensitive investors such as foreign central banks and the Federal Reserve are reducing their holdings, while price-sensitive domestic investors now hold more than half of all US debt (Figure 1, left-panel). ^[0] Other economies, such as the Eurozone, the UK, and Japan, are also facing precarious fiscal conditions as their respective central banks pull back.

With increasing supply and weakening price-insensitive demand, interest rates on US Treasuries rose sharply, reaching nearly 5% in recent years, despite the Fed cutting policy interest rates. Private investors and credit agencies have also reassessed the government’s creditworthiness. Moody’s downgraded US sovereign credit in May 2025, citing rapidly growing national debt and interest payments as key factors, while US sovereign CDS spreads widened to levels similar to countries rated BBB+, although some question the liquidity of such instruments.

The ‘One Big Beautiful Bill’ will widen the deficit and add to the national debt

Resorting to unconventional revenue sources

Supporting financial innovation and fine-tuning bank regulation

In principle, existing proposals for stablecoin legislation and reforming banks’ Supplementary Leverage Ratio (SLR) appropriately aim at fine tuning the macro-prudential regulatory framework and providing the necessary foundations for the healthy and productive development of the crypto industry. In practice, these proposals may be driven at least in part by the need to finance an unsustainable debt trajectory fueled by an expansionary fiscal policy stance at this juncture of the economic cycle. This is because the likely policy changes will boost, directly or indirectly, demand for US Treasury debt.

Stablecoin legislation will increase demand for US Treasury bills

Pending cryptocurrency legislation, and specifically stablecoin regulation via the GENIUS Act, seeks to establish clear regulatory guidelines that promote industry growth and responsible innovation. Although not explicitly stated, it is also likely to boost demand for short-term US Treasury debt. Since US dollar stablecoins will require 1-for-1 backing with short-term, high quality liquid assets (HQLA) such as Treasury bills, reverse repos, and bank deposits, a growing stablecoin market implies a growing investor base for Treasuries so long as stablecoins’ T-bill purchases do not crowd out other sources of Treasury bill demand.

Figure 3 shows that the market capitalization of US dollar-backed stablecoins exceeds $200 billion, and the sector purchased nearly $40 billion of US T-bills in 2024. This is small relative to the $2 trillion bitcoin market or the $7 trillion money market fund industry, but some evidence suggests that stablecoins’ Treasury purchases are already leaving a footprint in financial markets (Ahmed and Aldasoro, 2025). Once the GENIUS Act is passed, some estimates point to a $1.6 to $3.7 trillion stablecoin market by 2030 that generates over $1 trillion in demand for short-term US Treasury bills.

SLR reforms would increase demand for long-term US Treasuries

While stablecoin regulation will boost demand for short-term debt, SLR reform may raise demand for long-term Treasuries. On paper, SLR regulation intends to fine tune macro-prudential regulation by relaxing what is widely perceived as an excessively tight regulatory constraint on intermediaries (Duffie, 2023). In practice, proposals to exempt Treasuries from the SLR may indirectly address waning demand for long-term debt. For example, critical sources of long-term Treasury demand are drying up: the share of long-term Treasuries held by foreign central banks has been steadily declining (Figure 4, left-panel), and the Fed stopped purchasing long-term Treasuries in 2022. Consequently, domestic and foreign private ownership rose to fill the gap. Meanwhile, Treasury positions on dealer balance sheets are approaching a record $450 billion, as dealers have had to absorb more and more long-term Treasuries while the stock of outstanding US Treasury debt grows larger and demand from other buyers languishes (Figure 4, right-panel).

Exempting Treasuries from the SLR is garnering support from industry, academics and policymakers. Federal Reserve officials met on June 25 to consider changes to the enhanced SLR for the largest banks. As it stands, the SLR is the most binding capital requirement for large broker-dealer banks (Cochran et al., 2024). Under the existing framework, Treasury positions impose the same regulatory capital requirement on dealer banks as holding riskier assets, for a relatively low risk and high-volume activity. Consequently, Treasuries are costly for dealer balance sheets. If Treasuries were permanently exempted from the SLR, or alternatively if the SLR was made non-binding, then dealer banks could expand their absorption capacity for Treasuries, improving Treasury market depth and overall functioning (Braüning and Stein, 2024). ^[4]

Is it financial repression?

While advocates argue for these regulatory changes on their theoretical merits, when viewed together with the broader government debt financing strategy in the draft BBB and other debt financing options previously considered, it is difficult to ignore their potential as tools of financial repression. Financial repression refers to a policy regime in which regulation is used to channel capital to the government at below-market rates (Reinhart et al., 2011). Policies enabling financial repression include capital controls, directed credit, above-target inflation, central bank purchases of government debt, and financial regulation such as yield caps and liquidity rules (Reinhart et al., 2015).

Financial repression has been used previously in the US and in other developed countries. For example, the US government actively supported prices of government securities during World War II. And after the war, the government offered exchanges in which marketable securities could be swapped for non-traded, non-marketable securities. Following the Great Depression, interest on savings and time deposits were capped. Known as Regulation Q, this policy was eventually phased out in the mid 1980s, with statutory limits on interest for demand deposits finally completely removed in 2011. Following the 2010 European sovereign debt crisis, the Eurozone made regulatory capital changes that maintained zero risk weights for all sovereign debt issued by EU member countries, incentivizing banks to hold more government debt.

Financial repression is costly

Financial repression is well understood to distort capital allocation, thereby reducing long-term economic growth as capital is no longer deployed where it is most productive. Financial repression may also shift innovation to opaque corners of the system. Examples include Regulation Q that, by capping the interest on bank deposits, led to the emergence of the money market fund industry and the associated financial stability challenges. Through most of the 2000s and 2010s, in addition to strict capital controls still in place, China capped interest rates to channel capital into government-favored sectors. This eventually gave way to the rise of China’s monumental housing bubble and its very large shadow banking system.

Financial repression also masks fiscal risks and threatens financial stability by promoting leverage accumulation and seeding sovereign-bank feedback loops. SLR relaxation may encourage the buildup of additional leverage within the financial system if safe asset demand in arbitrage trading outpaces any additional supply freed up by the regulatory changes. Distorted incentives to purchase government debt may induce banks to take on excessive exposure to sovereign risk that can turn toxic if the government ever faces liquidity or solvency problems, as the bank-sovereign doom loop of the European debt crisis vividly illustrated (see the IMF’s Global Financial Stability Report).

There is also evidence that when banks are incentivized to purchase government-backed debt, government borrowing tends to crowd out lending to businesses, especially to smaller bank-dependent firms. Chakraborty et al. (2018, 2020) show how bank mortgage-backed security purchases stimulated mortgage origination activity that crowded out corporate credit provision.  Onder et al. (2024) provides direct evidence that dealer banks’ Treasury purchases cause them to reduce lending to firms. In practice, this means a higher cost of capital for all businesses, but particularly for small and medium-sized enterprises which are more bank dependent.

Is financial repression desirable?

Jeanne (2025) reports evidence suggesting that countries start to resort to financial repression when public debt exceeds 100% of GDP. Economic growth also tends to slow when public debt reaches these levels, making it difficult to simply “grow your way out” of high debt burdens (Reinhart et al., 2012). On the other hand, the academic literature has studied conditions under which defaulting, inflating away the debt, or adopting financial repression may be desirable. These conditions, however, hinge on not having access to alternative less distortive strategies to raise revenue, which is clearly not the case in the United States.

The risks to economic growth

The administration’s financial regulation proposals have desirable goals, such as enhancing the existing macro-prudential framework, improving Treasury market functioning, and fostering responsible crypto innovation. However, the proposed changes will also boost demand for US debt at a time when global investor confidence in US assets is declining and yields are rising. While debt management is a standard tool used by every government facing high and rising debt servicing costs, the combination of regulatory reforms and the proposed use of unconventional sources of tax revenue raises the question of whether the administration is about to embrace financial repression. Financial repression would dampen the growth potential of the US economy and make it much harder for the US corporate sector to access bank financing.