The United States is running multi-trillion-dollar deficits, with Treasury issuance ramping up to fund spending and interest payments. In FY 2025, net issuance of marketable debt is projected to exceed $2.5 trillion that at times has pressured the long end of the curve. This is a growing concern in that there is diminishing demand from traditional buyers.
Foreign central banks (notably China and Japan) have reduced their holdings, partly due to geopolitical tensions and reserve diversification. Primary dealers (JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, Barclays, Morgan Stanley) are absorbing more supply, but their balance sheet capacity is finite.
Top holders in 2025 include Japan: $1.13 trillion, United Kingdom: $808 billion and China: $757 billion. The Cayman Islands, Belgium, Luxembourg and Canada also hold hundreds of billions in U.S. Treasuries. Collectively, the top 15 foreign holders own over $6 trillion in U.S. Treasury securities. UK holdings have surged, up 13% year over year. Japan remains the largest holder, despite modest reductions, and China has steadily reduced its holdings, now at the lowest level since 2009. Foreign ownership of Treasuries overall hit a record $9.16 trillion in July 2025.
Thankfully, Treasury yields are inching lower since the Fed cut its short-term lending rate by a quarter point, and the market is banking on two more quarter-point cuts by year end based on recent inflation data and comments from Fed Chair Jerome Powell. Powell noted that job openings have declined, and wage growth has moderated, suggesting reduced upward pressure on inflation. He emphasized that the Fed is now “more concerned about unemployment than inflation,” signaling a dovish pivot.
This Fed pivot comes along at the same time the latest read on GDP from the Atlanta Federal Reserve is being revised higher. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 3.9% on Sept. 26, up from 3.3% on Sept. 17.
Assuming this lower rate environment unfolds in the months ahead and the economy remains healthy, income-oriented investors looking to lock in attractive fixed income yields that are not leveraged might consider shopping in the U.S. junk bond market. As of Q2 2025, the U.S. high-yield corporate bond market is estimated to be approximately $1.4 trillion in outstanding debt compared to a $10 trillion market for the investment grade corporate bonds.
In addition to potential price appreciation from lower short-term rates, high-yield bonds offer yields as high as 7%+, which are far higher than Treasuries or investment grade bonds, and they typically have shorter maturities, averaging five to seven years. This feature tends to provide good visibility and price stability where stocks that pay lofty yields can exhibit extreme volatility. In the event inflation rears back up, having shorter term maturities lowers duration risk if Treasury yields begin to rise again.
Rather than buying high-yield corporate individually, taking the path of investing in ETFs makes good sense for a few reasons — diversification, institutional access to highly desirable issues and monthly distributions. Expense ratios vary from 0.15% to 0.40%. The unlevered ETFs that carry the highest yields as of last Friday are as follows:
SPDR Portfolio High Yield Bond ETF (SPHY) — 7.42% Yield
SPDR Bloomberg Short-Term High Yield Bond ETF (SJNK) — 7.25% Yield
iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) — 7.01% Yield
Schwab High Yield Bond ETF (SCYB) — 6.95% Yield
iShares Broad USD High Yield Corporate Bond ETF (USHY) — 6.73% Yield
The next Federal Reserve meeting is scheduled for Oct. 28-29, and markets are heavily focused on whether the Fed will deliver a second rate cut, following the recent quarter point cut. The final meeting of 2025 will be held on Dec. 9-10. It might prove prudent before buying into the junk bond sector to see first how S&P 500 companies report sales and earnings growth during the first two weeks of the Q3 reporting season that kicks off the week of Oct. 13.
Forward corporate guidance will be key to knowing if the economy is absorbing the impact of tariffs well and whether the labor market, business investment and consumer spending remain healthy. Most of the recent data points indicate steady growthy ahead for the U.S. economy, but hearing it from America’s C-suites firsthand is more reliable than some of the government data that has been heavily scrutinized (aka: job revisions). When reaching for yield in the below investment-grade debt markets, investors want to be sure the economy is on terra firma.
