VANGUARD - Expressing the viewpoint of the Communist Party of Australia (Marxist-Leninist)
For National Independence and Socialism • www.cpaml.org
The bond market is not as prominent in most people’s lives as the share market.
Private companies and government can raise capital by issuing bonds which operate as IOUs. They are generally regarded as a safer investment than shares because they are issued with a definite rate of interest.
Unlike shares, their value does not rise or fall. What you pay, you will eventually get back. (Unless you choose to sell them, in which case you may either make a loss or a gain.) Like shares, the interest paid to bond-holders can only be derived from the surplus value created by workers’ labour power. In the case of government bonds, the government appropriates part of that surplus value through corporate and personal income taxation as well as from various fees and fines.
Bonds represent a loan from the investor to the issuer with the latter promising to repay any borrowed money, along with a set amount of interest. That promise, their word, is the guarantee of the bond’s value to the investor. Because they are regarded as safe and secure, bonds are also called securities.
Can the bond market collapse?
Safety and security are, of course, relative under capitalism. A bond market, just like a stock market, can collapse if the conditions are right. A collapse of the bond market would occur if confidence in bonds deteriorated so severely that investors rushed to sell, buyers became scarce, borrowing costs surged, and the financial system struggled to absorb the losses.
On October 9, Yahoo Finance warned of a global bond market “meltdown”, saying:
For the past month, global bond markets have been in the grips of a historic sell-off triggered by a tangle of complex economic issues ranging from the ongoing war in Iran to rising deficits to the race to build out data centers to power artificial intelligence.
Among the “tangle of complex economic issues”, Government debt can be a major cause of bond market instability. Governments, like the US, that continually run large budget deficits must issue new bonds to finance spending and refinance maturing debt. If investors begin to doubt a government's ability or willingness to service its obligations, they may demand much higher interest rates or refuse to buy its bonds.
If there is a sudden surge in interest rates, new bonds will offer higher yields than old bonds at a lower fixed interest rate, and investors holding them will find them less attractive and may seek to sell them below their value.
Two recent examples of bond market crashes occurred in the US in March 2020 and the UK in September-October 2022. In the US case, investors spooked by the Covid-19 pandemic rushed to sell US Treasury securities, normally regarded as among the world's safest assets, in return for cash. The Federal Reserve intervened on a very large scale to support the functioning of the bond market.
In the UK case, a change in government fiscal policy led to a massive sale of UK government bonds requiring intervention by the bank of England to reverse the collapse.
The global bond market is usually larger than the global share market, so its collapse could have more severe consequences for global capitalism. However, recent data suggests that there has been something of a reversal: the total value of contemporary global stock markets is approximately $160–165 trillion, while the global bond market is approximately $109 trillion. Perhaps one of the reasons for the surge of speculative capital into the share markets is the spate of IPOs launched by AI companies. Musk’s SpaceX in June 2026 was the largest ever IPO, at a valuation of US$1.77 trillion, making Musk the world’s first trillionaire. Anthropic’s forthcoming IPO is predicted to surpass SpaceX as the biggest capital market fundraising in history. The bubble is getting bigger…
How does the US dollar, as a fiat currency, sustain the US debt?
A fiat currency is one that is not convertible into a fixed quantity of gold or any other commodity. The US dollar has been a fiat currency since August 1971. Being a fiat currency means that the US Treasury can create as many dollars as it wishes, and use those to pay interest on Treasury bonds, and to pay back their cost when they mature.
The US Treasury can both issue bonds to access investors’ capital, drawing on the US dollar foreign reserves of other governments and international investors, and create the money to service the bond. But creating extra dollars does not of itself create extra value. That can only be done by the productive use of capital when it is utilising the labour power of employed workers.
Government bonds are therefore a form of interest-bearing fictitious capital: they represent a transferable claim on the government’s future income derived from surplus value and obtained through taxes and other imposts.
While the US Treasury can create new dollars, it cannot do this indefinitely without causing inflation, interest rate rises and currency devaluation. The US dollar can sustain US debt but not forever.
China and US Treasury bonds
The market for US Treasury bonds is a potential source of crisis because the US dollar is the basis of international finance. The issuing of US Treasury bonds keeps the US in debt to global investors. The central question is therefore not simply how much debt the US government has accumulated, but whether investors remain willing to finance that debt, at what interest rate, and whether the financial system can withstand a sudden change in confidence.
A complicating factor is the Chinese purchase of US Treasury bonds.
The US anxiety over China’s financing of the US deficit was revealed in 2010 when Australian PM Rudd met with US Secretary of State Hillary Clinton. Rudd advised Clinton to accept a Chinese presence on the world stage but to keep force as a back-up, and Clinton became exasperated and asked “How do you deal toughly with your banker?”
Within three years, China had reached the peak of its holdings of US Treasury bonds. They were estimated to be worth $1.3 trillion in 2013. The figure has gone down since as China seeks to diversify its holdings and to use the yuan and the rouble in trade with the Russian Federation. As of August 2026, China held approximately $590.7 billion in U.S. Treasury securities.
China has no plans to plunge bond markets into a crisis for anti-hegemonic purposes
There are some on the Left who believe that China is divesting itself of US Treasury bonds to create difficulties for the US dollar in anticipation of making the yuan the currency of international trade.
This view is particularly held by those who maintain that social-imperialist China is still a socialist country, and that its divesting itself of US Treasury bonds is a progressive anti-hegemonic struggle.
An actual estimate of China’s holdings is difficult as China has been transferring some of its US Treasury bonds to third-party custodians such as Belgium (Euroclear) or Canada, in which case the value of these assets would be recorded under the name of the custodian country rather than China, meaning China's actual exposure may be higher than official data suggests.
The U.S. Treasury Department itself acknowledges that if U.S. Treasury bonds purchased by foreign customers are held in custodial accounts in third countries, the true ownership will not be reflected in the data.
Just last week, the financial website Bloomberg intimated that China had placed hundreds of billions of US Treasury bonds in Canada. According to Brad Setser, a senior fellow at the Council on Foreign Relations and former U.S. Treasury official, during the period when officially recorded Chinese holdings continued to decline, the U.S. Treasury holdings recorded under the names of Canada and Belgium rose abnormally. For example, Canada's holdings increased from $169 billion five years ago to $465 billion in August 2026, and Belgium's from $228 billion to $490.5 billion.
Rather than engaging in anti-hegemonic moves, China is advancing its own hegemonic interests. It is helping US imperialism, its economy and its foreign policy, by financing its trade deficit whilst looking for opportunities to promote alternatives to US dollar global trade.
Xu Gao, Chief Economist of Bank of China International (China) Co., Ltd., wrote of China’s game plan back in June. He said, in words that will disappoint those who believe “China is leading an anti-hegemonic bloc”, that the priority for China should not be to overturn the dollar-centred system prematurely or to make renminbi internationalisation a bid to replace the dollar. It was not in China’s interests, he wrote, to overturn the dollar-centred system of international payments. He cautions that replacing the dollar with another sovereign currency would be extremely difficult.
Xu Gao believes that the most likely direction of change is a supranational currency supported by multiple sovereign currencies. It would work in a limited sphere and alongside the US dollar. China had proposed the R5 in October 2024, a currency for trade between the BRICS countries. However, this failed to eventuate when the US threatened that if the BRICS countries did not use the US dollar to trade, the US would impose heavy sanctions on those countries. India became the first country to back out of the BRICS currency concept in December 2024. That was a big setback because India is a major player in BRICS, and without India's participation, a common BRICS currency won't be possible.
China’s purchase of US Treasury bonds is part of the collusion vs contention paradigm that marks the relations between US imperialism and Chinese social-imperialism.
Analysts concur that the bond market is in “meltdown”, that is, it is on the way to a systemic crisis.
So long as public confidence in the bond markets can be sustained, a systemic crisis can be postponed. If confidence plunges through the inability of the US to maintain interest payments, or a sufficient number of countries use alternative payment arrangements to avoid the erratic imposition by the US of sanctions on countries using the dollar in their trade relations, then there may be a crisis that will include Australia in its impacts.
Workers may be in for an even rougher time that at present.
Further reading:
Xu Gao: The future of money, and China’s choices
Bloomberg: Talk grows that China is routing US Treasury holdings through Canada:
Yahoo Finance: Global Bond Markets Are in Meltdown—Here’s Why U.S. Homebuyers Should Pay Attention