How the US sanctioned itself in Ukraine

Surging US Treasury yields are the main driver of global markets, depressing stock prices, pushing up the US dollar exchange rate, and threatening homebuilding and other rate-dependent economic activity in the United States. As rates rise, moreover, the US Treasury deficit – already above 6% of GDP – will increase. Interest payments on the federal debt rose to $1 trillion from $400 billion in 2021, adding to the blowout federal borrowing requirement of $1.8 trillion.

Foreign central banks meanwhile have cut their holdings of US government debt, adding to upward pressure on yields – by a painful 0.8 percentage points, according to my calculation. The seizure of Russian foreign exchange reserves in 2022 led central banks to shift out of dollar assets. The reserve seizure probably did more damage to the US economy than to Russia’s.

The Federal Reserve caused most of the rate surge by raising the rate at which it charges banks for overnight money, to be sure. But a significant increment in the so-called real yield of Treasury bonds – in this case, the interest rate on inflation-indexed Treasuries (TIPS) – is due to reduced purchases of US debt by foreign central banks. Roughly 80 basis points (8/10ths of a percentage point) are explained by reduced foreign central bank holdings of US government debt.

Foreign central banks, including those of China, India, Saudi Arabia, and Turkey, began shifting their foreign exchange reserves into gold and out of Treasuries after the US and its allies seized half of Russia’s $600 billion in foreign exchange reserves in early 2022, following Russia’s invasion of Ukraine.

The chart below shows how big the impact of foreign central bank sales of US government debt has been.

The red line shows