“Look, there’s nothing magic about that $40tn number,” the US Treasury secretary, Scott Bessent, told CNBC insouciantly last week, as the country’s debt mountain surpassed another bleak record.
Yet Bessent’s decision to intervene in government bond markets in an effort to combat soaring yields belied his studied calm in TV interviews – and reignited fears the US may be on the road to a debt crisis.
Half a lifetime ago, in 1992, Bessent cut his teeth in markets shorting the pound alongside George Soros in the chaos that led up to Black Wednesday, when the UK plunged out of the European Exchange Rate Mechanism.
Today he is on the other side of the tussle between policymakers and markets. When the US Treasury intervened to help prop up the Japanese yen earlier this month – crucially by selling euros, not the US dollar – it was widely read as a sign of weakness.
Japan is a mega holder of US treasuries, and it looked as though the Trump administration was fretting that Tokyo might be preparing to dump a chunk of them to buy yen – potentially pushing up the yield, or interest rate.
The US Treasury’s announcement that Japan would in future be able to use a little-known facility called the Foreign and International Monetary Authorities Repo Facility, effectively to borrow against its treasury holdings without having to sell them, was read as another sign of concern.
As the economist Barry Eichengreen wrote in the FT at the time: “The bottom line is that Washington, fearing the consequences for US financial markets, is reluctant to see foreign central banks use their dollar reserves. This is telling us that the dollar is not the attractive reserve currency it once was.”
In last week’s fresh intervention Bessent promised to double the rate at which the Treasury woul buy up the longest-dated bonds – hoping to massage the yield downwards.
It was the clearest sign yet of anxiety in Washington about a sell-off that has pushed up yields on 30-year government bonds to levels last seen before the global financial crisis in 2008.
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There are several, overlapping reasons for the bond market sell-off. One is inflation. Treasuries, which pay a fixed amount each year, are in part a bet on the future value of money – with higher inflation eroding the real value of those payments.
With the Iran conflict slipping towards a forever war, keeping oil prices elevated, and amid concerns about the new Federal Reserve chair Kevin Warsh’s willingness to raise interest rates, investors are fretting more about future inflation.
Another reason lies in the extraordinary AI investment boom. Tech giants have been funding the buildout of vast datacentres by issuing a wall of corporate debt.
Debt issuance by the “hyperscaler” AI companies is already $219bn (£160.5bn) so far this year, according to analysis by JP Morgan – potentially offering investors an alternative to treasuries and crowding out public debt.
Third, and most worrying, is the gnawing sense that despite continued robust economic growth, the US is not the rock-solid creditor it once was.
US public debt has exploded in recent years, smashing through every forecast. It lurched higher after the financial crisis and took another leg up during the Covid pandemic. It has continued to surge in Donald Trump’s second term, as tax cuts have been unmatched either by tariff revenue – some of which is now being repaid – or by spending cuts from Elon Musk’s short-lived Department of Government Efficiency.
Without radical policy change, for which there seems little appetite on Capitol Hill, the independent Congressional Budget Office expects US government debt to rise from 100% of GDP today to 175% in 30 years’ time.
Meanwhile, with his unwinnable war in the Middle East, capricious tariff regime and penchant for self-enrichment on an epic scale, Trump is turning the US into an increasingly unpredictable player in the global economy. Instead of the guarantor of rules-based markets and open global trade routes, the US has become a source of uncertainty and chaos.
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As Adam Posen of the Peterson Institute for International Economics put it in a recent piece: “The entire world is now doing business, investing, and trying to make a living in the post-American world economy.”
The withdrawal was largely a deliberate decision by Trump’s Maga crew, who felt the US was shouldering too many of the running costs of the geopolitical order.
Yet it was partly this role as the anchor of the global economy, with treasuries the quintessential safe haven asset, that prevented the logic of runaway deficits and spiralling debt from hitting home.
By contrast, Bessent’s panicky intervention last week smacked of rising anxiety about how markets now view the US fiscal position.
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Far from drawing a line under the bond rout, 30-year yields were rising again by Friday afternoon, while at the same time the dollar was sliding fast – a cursed correlation more often associated with emerging economies.
Bessent seemed to be signalling a willingness to step in again, if 30-year yields are pulled too far above 5%. As the financial commentator Stephen Innes put it: “Once traders think they have identified a policy pain threshold, they tend to come back and test whether it is real.”
Warsh will have his moment in the spotlight at the Jackson Hole central bankers’ conference this week, but the risks are clearly growing of a self-inflicted bond market crisis – with consequences that would ripple out far beyond the US.
