TLT and VGLT ETFs shed billions as US public debt nears $39 trillion

Wall Street investors are getting jittery as the US public debt surges in an uncontrollable manner and the rising 30-year yield.

The popular iShares 20+ Year Treasury Bond ETF (TLT) has shed over $5 billion this year, while the Vanguard Long-Term Treasury ETF (VGLT) has lost over $110 million this year. 

TLT and VGLT ETFs have had outflows as US debt jumped

In contrast, fixed income investors have piled into short-term government bonds, with the State Street SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) adding over $7 billion.

The ongoing performance is mostly because investors are afraid of the public debt is taking, with data by the Federal Reserve showing that it has jumped to $38.5 trillion this year from just $5.6 billion in 2000.

This trend will likely continue as government spending continues rising , with President Donald Trump requesting $200 billion to fund his Iranian war and $1.5 trillion to fund the military.

Estimates are that the Big Beautiful Bill will add trillions of dollars to the public debt in the next decade, helped by the tax cuts to the wealthy and the Middle Class. 

While Trump's tariffs are meant to reduce the debt, they are in a state of limbo after the Supreme Court ruling. Trump has replaced them with broad tariffs that can only last for 180 days. He will need to replace them with more targeted levies, which will be a bit more limited than those he implemented last year.

China has been selling US government bonds

At the same time, there are signs that holders of US public debt are paring back their assets. China, in particular, has reduced its holdings from over $1.2 trillion a few years ago to $694 billion.

It has now become the third-biggest holder after Japan and the UK, which hold $1.2 trillion and $895 billion, respectively. The other top holders are countries like Belgium, Luxembourg, the Cayman Islands, and Canada.

With the US relationship with top countries worsening, there is a risk that some of them will opt to either scale back their holdings or stop investing in US debt. 

These fears rose recently when the Greenland crisis was escalating. European countries warned the US that they would dump these assets if it escalated.

The VGLT and TLT ETFs have shed assets for their underperformance despite having large yields. TLT yields 4.5%, while the VGLT yields 4.5%, higher than most equity ETFs. Data shows that the two funds have had a total return of 0.15% and 0.34%, respectively this year. 

VGLT vs BIL vs TLT ETFs | Source: SeekingAlpha

Their total returns in the last three years are minus 8.54% and 5.24%, respectively. On the other hand, the less risky BIL has returned 14.78% in the last three years and 0.98% this year.