The US Treasury intervened in government bond markets last week, a move that has reignited concerns about the nation’s fiscal position and potential for a debt crisis. Treasury Secretary Scott Bessent announced plans to double the rate at which the Treasury would purchase the longest-dated bonds, aiming to reduce yields.
This intervention follows a period of rising anxiety in Washington regarding a sell-off that has pushed yields on 30-year government bonds to levels not seen since before the 2008 global financial crisis. The country’s debt has surpassed $40 trillion, a record figure.
Several factors are contributing to the bond market sell-off. Inflation is a key concern, as higher inflation erodes the real value of fixed-amount treasury payments. The ongoing conflict in Iran is keeping oil prices elevated, and investors are also monitoring the new Federal Reserve chair, Kevin Warsh, for his willingness to raise interest rates.
Another contributing factor is the significant investment boom in artificial intelligence. Tech companies, referred to as hyperscaler AI companies, have issued $219 billion in corporate debt this year to fund data center construction. This corporate debt offers investors an alternative to treasuries, potentially crowding out public debt.
Perhaps the most significant concern is a growing perception that the US is no longer the stable creditor it once was, despite continued robust economic growth. US public debt has surged in recent years, increasing after the financial crisis, during the Covid pandemic, and continuing to rise in Donald Trump’s second term. Tax cuts have not been offset by tariff revenue or spending cuts.
The Congressional Budget Office projects that without substantial policy changes, US government debt will increase from 100% of GDP today to 175% in 30 years. The Trump administration’s foreign policy, including an ongoing conflict in the Middle East and a capricious tariff regime, is viewed as contributing to global economic uncertainty, with some economists suggesting the world is now operating in a post-American economic landscape.
The US Treasury’s earlier intervention to support the Japanese yen by selling euros, rather than dollars, was also interpreted as a sign of weakness. Japan is a major holder of US treasuries, and the move suggested the Trump administration was concerned Tokyo might sell its holdings to buy yen, which would push up treasury yields. The Treasury also announced that Japan could use the Foreign and International Monetary Authorities Repo Facility to borrow against its treasury holdings without selling them, another indicator of concern.
Despite Bessent’s recent intervention, 30-year yields were rising again by Friday afternoon, and the dollar was sliding, a correlation often associated with emerging economies. Bessent has indicated a willingness to intervene again if 30-year yields exceed 5%. Warsh is expected to address these issues at the Jackson Hole central bankers’ conference this week, as risks of a self-inflicted bond market crisis continue to grow.
