Rising focus on funding flows highlights deeper risks to US fiscal sustainability than headline “sell US” trades suggest.
Summary:
PBOC adviser flagged risks around US fiscal sustainability
UBS says “sell US” narratives miss the real issue
Fiscal crises stem from lost funding inflows, not mass selling
US more exposed due to reliance on foreign capital
Japan less vulnerable given domestic funding base
Concerns around US fiscal sustainability are resurfacing in global markets, with growing emphasis on funding dynamics rather than outright asset liquidation. Yesterday’s commentary from a senior adviser linked to the People's Bank of China warned that rising US deficits and debt issuance risk straining confidence among global investors, particularly at a time when geopolitical tensions and trade frictions are reshaping capital flows. The message was clear: sustained reliance on external funding leaves the US increasingly exposed to shifts in global appetite for dollar assets.
New analysis from UBS reinforces that view, pushing back against simplistic narratives around “sell US” trades. UBS argues that fiscal crises are rarely triggered by mass selling of existing debt holdings. Instead, the real danger lies in reduced inflows, a slowdown or withdrawal of marginal buyers willing to fund ongoing deficits. In that sense, the focus on bond sell-offs misses the underlying vulnerability.
Historical precedents underline the point. The UK’s 2022 gilt crisis under Liz Truss and the Greek sovereign crisis a decade earlier were not driven by wholesale liquidation of government bonds, but by a sudden evaporation of funding. When investors became unwilling to roll or absorb new issuance at prevailing prices, yields surged and confidence collapsed, forcing abrupt policy reversals.
This distinction matters acutely for the United States. Unlike Japan, which relies heavily on domestic savings to fund government debt, the US depends significantly on foreign capital inflows to finance persistent fiscal shortfalls. A sustained reduction in overseas demand, whether due to political risk, concerns over long-run debt trajectories, or portfolio reallocation, could exert upward pressure on yields even without active selling by existing holders.
Japan, by contrast, remains largely domestically financed, giving it greater insulation from sudden shifts in global funding sentiment despite its high debt-to-GDP ratio. That contrast helps explain why market stress can emerge more abruptly in economies dependent on external financing.
Taken together, the PBOC-linked warning and UBS analysis highlight a shared theme: fiscal sustainability risks crystallise when confidence in future funding weakens. For the US, the risk is less about an immediate bond market revolt and more about whether global investors remain willing to continuously fund expanding deficits at acceptable prices — a question that is likely to grow more prominent as issuance rises and global financial conditions tighten.
Don't press, we are a long way from this.
