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- The stock of outstanding Treasuries has ballooned by 126% over the past decade, to nearly $32trn.
- Yield-hungry private investors and hedge funds, powered by leverage, now hold a growing slice of the market — and their demand can evaporate in moments of stress.
- Salvaging the market’s special status now falls to Kevin Warsh at the Federal Reserve, treasury secretary Scott Bessent and Congress.
- That status is worth about 1% of GDP a year in interest spending — more than $300bn today.
Since Richard Nixon severed the dollar’s tie to gold in 1971, global finance has floated on a sea of Treasuries. No asset carries more weight than America’s government debt. It serves as a refuge for investors in perilous times, and trillions of dollars in contracts and securities worldwide are priced against Treasury bonds.
High debt, disjointed markets and pugnacious trade policy all threaten the world’s safe asset
Yet, as our special report details, the world’s safe asset has known better days. The stock of outstanding Treasuries has ballooned by 126% over the past decade to nearly $32trn, far outpacing steady demand from foreign central banks and the like. In response, yield-hungry private investors and hedge funds, powered by leverage, have claimed a growing slice of the market. Occasionally—most notably in March 2020—this demand has abruptly evaporated, sending short-term funding costs soaring and forcing the Federal Reserve to buy bonds and, in effect, underwrite the market.
Growth in outstanding Treasuries over the past decade
Treasuries outstanding
America’s budget deficit
Economic and geopolitical currents are also eroding demand for Treasuries. The resurgence of inflation since 2021 has often pushed stocks and government bonds down together, so Treasuries have lost their valuable role as ballast for riskier portfolios. Meanwhile, America’s belligerent trade policy and its repeated use of financial sanctions (whatever their merits) have made foreign buyers hesitate before becoming long-term creditors to Uncle Sam.
If these patterns persist, the market risks losing a special status that bestows crucial benefits on both America and the wider world. Salvaging the situation raises tough questions for Kevin Warsh, the new chair of the Federal Reserve, for Scott Bessent, the treasury secretary, and for Congress.
What the Fed must do
Mr Warsh has declared his intention to reduce the Fed’s holdings of Treasuries. That goal is achievable, even if it will require still more private demand. Yet Mr Warsh must also stand ready to buy bonds at a moment’s notice to calm a sudden seizure. Any such intervention would demand a defter hand than the Fed has shown before, when it failed to distinguish quantitative easing (QE)—bond purchases aimed at stimulating the economy—from short-lived “market functioning” interventions designed to halt fire sales. In the past, it did not need to: in March 2020, for instance, both goals were operative at once, and inflation was quiescent.
Today the economy does not want for stimulus, but the bond market could still need rescuing. It would be a disaster if a purchase of bonds to unclog financial plumbing were read as the Fed kowtowing to President Donald Trump’s desire for loose money. So Mr Warsh must prepare a battle plan for a surgical intervention. The Bank of England offers a model: during a sell-off in British gilts in 2022, after a disastrous “mini-budget”, the bank bought bonds aggressively but promised to exit the market as soon as possible. It kept that promise within months, and even ended up turning a profit for taxpayers.
Regulators and Congress must act too
Reforming the market will require America’s many other regulators to work in tandem with the Fed. Trading currently runs through dealer banks, which have struggled to clear the market in moments of stress. Trading data are published daily, unlike the real-time reporting in the corporate-bond market. Quicker reporting would allow for the development of so-called all-to-all trading. Like the stockmarket, any investor could buy and sell directly to any other, boosting liquidity.
All-to-all trading — a market structure in which any investor can buy and sell directly to any other, as on the stockmarket, rather than only through dealer banks.
But the most important remedy lies in the hands of politicians. America’s budget deficit, at around 6% of GDP, has no peacetime parallel except during deep recessions. Further fiscal pressure is coming, not least when the Social Security trust fund runs dry in six years. Mr Bessent is easing the strain of rising interest payments by favouring short-term debt, which is cheaper to service today but leaves the government more exposed to a crisis because it must be frequently refinanced. As for Congress, which writes the budget, it worries about the market only during its regular brinkmanship over the debt ceiling, a statutory limit that must regularly be lifted. Both the executive and the legislature must summon the will to confront the underlying long-term problem and find ways to shrink borrowing.
Breaking bonds
It is not too late to halt the slow, steady erosion of the Treasury market. The prize is enormous.
1% of GDP
By one estimate, America’s role as the world’s supplier of safe assets saves the country about 1% of GDP in interest spending each year, which today means more than $300bn.
Only Treasuries can sate the world’s need for safe and liquid assets. There are few winners from letting the foundation of the global financial system rot. ■
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