Who actually owns the US national debt

The most persistent myth about the national debt is that the United States owes it to China. China is a meaningful holder, but a small one — a low single-digit percentage of the total, and its holdings have been shrinking for over a decade.

The actual ranking

• US government trust funds — mainly Social Security and Medicare, holding non-marketable securities. The largest single category.
• US domestic investors — pension funds, mutual funds, insurers, banks, state and local governments, and individuals buying Treasuries directly.
• The Federal Reserve — holds a large portfolio accumulated through quantitative easing, and remits its interest earnings back to the Treasury.
• Foreign holders — under a quarter of the total, led by Japan, with the United Kingdom and China also significant.

Why the Federal Reserve’s share is strange

When the Fed holds Treasury debt, the government pays interest to an institution that returns almost all its profit to the Treasury. That portion of the debt is, in practical terms, close to interest-free for as long as the Fed holds it.

This is why the Fed reducing its balance sheet has a fiscal consequence that rarely makes headlines: as those securities roll off, they are reabsorbed by private buyers who keep the interest.

Could China damage the US by selling?

Less than the framing suggests. A large, fast sale would push Treasury prices down and yields up, raising US borrowing costs — real damage, but also self-inflicted, since China would be selling into the fall it caused and would have to park the proceeds somewhere.

There is also no market deep enough to absorb that capital. The Treasury market’s size is precisely what makes it the default place to hold reserves, and the alternatives are smaller and less liquid. The mutual-hostage framing is closer to the truth than the weapon framing.