New on FinoLib · Volume III: Finance Encyclopedia
My latest article is now live on FinoLib, the free finance library I write: Sovereign Credit Ratings and Who Holds Government Debt, from Volume III: Finance Encyclopedia. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
3.5 Who Holds Sovereign Debt, and Why It Matters
The idea in plain words
Who owns a government’s debt shapes how that government behaves in a crisis. Foreign private investors can leave the fastest. Domestic banks are steady in calm times, but in a crisis they can tie the state and the banking system together in what is called a doom loop: the government’s trouble hurts the banks that hold its bonds, and weak banks make the government’s trouble worse.
Key points
■In July 2026 foreign investors held about 28.9% of US debt held by the public and the Federal Reserve about 14.1%.
■Direct retail holdings are small: US savings bonds were about 0.46% of the debt held by the public.
■Basel Committee members apply a 0% risk weight to banks’ holdings of their own sovereign’s domestic-currency debt.
A closer look
The US creditor base shows the categories at work. At the end of July 2026, debt held by the public was $32.05 trillion. Foreign investors held $9.25 trillion of it, $9,248.1B ÷ $32,045.9B = 28.9%, and foreign official holders (central banks and governments) $3.77 trillion, or 11.8%. The three largest foreign holders were Japan ($1,103.9 billion), the United Kingdom ($998.3 billion, much of it custody for investors elsewhere) and mainland China ($618.0 billion). The Federal Reserve held about $4.52 trillion, roughly 14.1%. US savings bonds, the purest retail holding, were only $146.9 billion in August 2026, about 0.46% of the debt held by the public. Most household ownership runs through money market funds, mutual funds and pensions, which behave like institutions.
Decision rule
Map the creditor base before you trust a debt ratio. If non-residents hold more than about 45% of public debt, treat the country as exposed to a sudden stop; the IMF’s 2013 heat map flags that level as high risk for both emerging and advanced economies, with moderate risk starting at 15% for emerging markets and 30% for advanced ones.
The costliest mistake
Counting domestic bank holdings as pure safety. They make a bond auction more reliable in calm times, but they turn a fiscal problem into a banking problem in a crisis. Take a bank with $10 billion of assets, $800 million of equity capital (8%), and $2.5 billion of its own government’s bonds with an average duration of 6.
Recap
The creditor base shapes how debt behaves under stress: foreign private investors can leave fastest, central-bank holdings recycle interest to the government, and direct retail holdings are small. Domestic banks give steady demand in calm times, but the 0% risk weight on their own sovereign’s bonds ties bank capital to the state’s credit in a bank–sovereign doom loop.
3.6 Sovereign Credit Ratings
The idea in plain words
S&P, Moody’s and Fitch grade countries on their institutions, economy, fiscal strength, external strength and monetary flexibility. They give separate ratings for debt in foreign and local currency. The line that matters most is BBB− at S&P and Fitch, or Baa3 at Moody’s, because many investors are not allowed to hold debt below it. Cross that line and a country’s borrowing can suddenly get harder and more expensive.
Key points
■The US is rated AA+ by S&P (2011) and Fitch (2023) and Aa1 by Moody’s (May 2025).
■Moody’s cited interest rising from about 18% of revenue in 2024 toward about 30% by 2035.
■A fall below investment grade triggers forced selling by mandates and indexes, whatever the credit view.
Decision rule
Use ratings to know who is allowed to hold a bond, and market prices to know what the bond is worth. If a sovereign rated BBB− (Baa3) has a negative outlook or is on review for downgrade, assume forced selling by investment-grade-only holders if the downgrade happens, and size positions so you are not one of them. If the country’s bond spread already trades in line with countries one or two notches lower, the market has priced the downgrade, and the rating action itself will move prices less.
The costliest mistake
Holding a BBB− sovereign bond in a portfolio that must sell below investment grade, on the theory that the rating is stable. Ratings move after the fundamentals do, so the downgrade usually comes after the price has started falling, and the forced sale then happens at the worst price. On the example above, a 1-point spread widening costs $80,000 per $1 million; if the forced seller must also cross a wide bid-ask spread in a crowded market, the loss is larger.
What the full article covers
In the full article I take you through these sections:
■3.5 Who Holds Sovereign Debt, and Why It Matters
■3.6 Sovereign Credit Ratings
It includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume III: Finance Encyclopedia
Read the full article on FinoLib
The complete article, Sovereign Credit Ratings and Who Holds Government Debt, with every worked example, diagram, quiz and source, is free to read in Volume III, Finance Encyclopedia on finolib.com.
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