Trump's Debt Legacy: US Bond Markets on Brink of Crisis

The US Treasury's recent interventions in government bond markets have raised concerns about a potential debt crisis. The country's public debt has surpassed $40tn, and Treasury Secretary Scott Bessent has been working to combat soaring yields.

Bessent's decision to intervene belies his calm demeanor, sparking fears that the US may be on the path to a debt crisis. He cut his teeth in markets shorting the pound alongside George Soros during Black Wednesday in 1992 and is now on the other side of the tussle between policymakers and markets.

The Treasury's recent move to help prop up the Japanese yen by selling euros, not the US dollar, was seen as a sign of weakness. Japan is a major holder of US treasuries, and the Trump administration may be concerned that Tokyo might dump a chunk of them to buy yen, pushing up yields.

The economist Barry Eichengreen wrote that Washington's reluctance to see foreign central banks use their dollar reserves indicates that the dollar is no longer the attractive reserve currency it once was. The Treasury has doubled the rate at which it buys up long-dated bonds in an effort to massage yields downwards, but this may not be enough to calm markets.

The bond market sell-off is driven by several factors, including inflation concerns due to the Iran conflict and the potential for higher interest rates under new Federal Reserve Chair Kevin Warsh. The extraordinary AI investment boom has also led to a surge in corporate debt issuance, potentially crowding out public debt.