The yield on the 10-year Treasury bond is reaching highs not seen since 2007, and it’s happening just as the U.S. Treasury is issuing more debt more quickly than predicted. One effect is that longer-term debt is becoming more expensive. There are many reasons for this, but one is that some of the folks who usually buy that debt are becoming a little less interested.

“The Federal Reserve is now reducing their holdings, commercial banks … aren’t growing their assets, they are shrinking their balance sheets,” said Daniel Gerard, senior multi-asset strategist at State Street Global Markets.

Japan and China may be less interested in Treasurys as well. As foreign countries go, they are big holders of U.S. debt.

“Two of the biggest — No. 1 and No. 2,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center.

In case you’re wondering, most of our government debt is held domestically; only about 30% is held abroad. But about a third of that is held by China and Japan; it comes out to a little more than $2.1 trillion in U.S. Treasurys. 

Now those countries are backing off Treasurys.

“That doesn’t mean they don’t have appetite, but it does mean they are diversifying a little bit away from U.S. Treasurys,” Lipsky said.

The reasons reflect things going on in the Chinese and Japanese economies. China’s central government is taking more control of the country’s finances at a time when the economy is slowing down, and Chinese politicians may therefore use more of the government’s own money to deal with those troubles at home.

“To invest more domestically and to help regenerate growth in their economy, and they believe they can do that through domestic investments, and so they put a little less in U.S. Treasurys,” Lipsky said.

The slowdown in China’s economy has already led the government to lower interest rates and may push them to lower rates further, which would lower the value of the Chinese yuan as well, said Gerard at State Street Global Markets.

“If we have lower growth expectations, lower investment opportunities and potential lower interest rates that the government will put in place to stimulate that growth again, then you also have less demand for the currency.”

China may wish to protect the currency from weakening too much, which would mean intervening in currency markets. It would do so by selling Treasurys, or at least not buying more, Gerard said.

In Japan, currency also plays a role in reduced appetite for U.S. Treasurys. The yen is at a decades low, and some investors think it might rise as interest rates rise in Japan. If the currency does strengthen, that would eat into the value of investments in Treasurys.

“If you’re a Japanese investor and you bought U.S. dollar bonds, the big risk you face is the yen will go up and the dollar will go down, and the yen value of your dollar bonds will go down,” said Brad Setser, senior fellow at the Council on Foreign Relations.

So, it wouldn’t make much sense for Japanese investors to buy a lot more Treasurys. Plus, rates are rising slightly in Japan, and it might make more sense to invest at home. 

Both China and Japan have their own complicated sets of reasons for possibly buying fewer U.S. Treasurys. This paring back of demand expectations is helping drive up the borrowing costs for the U.S. government.