Financial markets have been rocked by an unprecedented sell-off in US Treasuries, becoming the most significant macroeconomic event of the summer.
The reason for the investor panic is the official confirmation from the US Treasury Department that gross national debt has crossed the historic mark of 40.047 trillion dollars. In less than a decade, the federal debt of the largest economy has doubled, forcing the administration to go into emergency crisis management mode.
Why are investors fleeing US bonds?
The massive sell-off, which experts describe as a “buyers' strike“, is due to a combination of critical factors. First and foremost are concerns about an uncontrollable budget deficit (in July alone it reached $432 billion) and fiscal policy. Additional pressure is exerted by the geopolitical crisis in the Middle East and the expiration of the ceasefire agreement between the US and Iran, which keeps the price of Brent oil above $91-94 per barrel and fuels a new wave of inflation.
The collapse in bond prices has sent their yields skyrocketing (which move inversely with the price). The 30-year bond yield reached 5.34% – a record since 2007, and 10-year bonds are trading at levels of 4.71%–4.75%, which drastically increases the cost of servicing the American debt. The technology sector is also having an impact – giants like Amazon and Meta are issuing huge corporate debt to finance AI infrastructure, diverting much of Wall Street's free capital.
Treasury Secretary Scott Besant's emergency intervention
In an attempt to stop panic before the upcoming midterm elections in the US, Treasury Secretary Scott Besant announced an emergency intervention. The government is doubling the volume of its planned buyback of its own long-term bonds (with maturities of 10 to 30 years) – from 2 billion to at least $4 billion per operation. The measure, which takes effect on September 9, has temporarily eased tensions, but bank strategists agree that it is a “drop in the ocean“.
Analysts from Goldman Sachs and TD Securities commented that Bessent's tactical moves buy some time but do not solve the structural problem: government spending on Social Security, defense and Medicare is growing much faster than revenue. The US is already spending $1.4 trillion a year just in interest on its loans.
What will the earthquake lead to?
The consequences of the sell-off of US government debt are already being felt around the world and will determine the economic agenda in the coming months:
- Increased credit prices for citizens (Main Street): The jump in Treasuries yields automatically raises interest rates on mortgages, car loans and credit cards in the United States.
- US dollar depreciation: Due to the revaluation of fiscal risks, the dollar index collapsed to a three-month low (around 98.76-98.80 points), and the euro appreciated to $1.17.
- Growth of alternative assets: Investors are massively seeking salvation from fiat currencies. Gold jumped to historic highs of over $4,500 an ounce, and Bitcoin posted a strong weekly gain, crossing the $69,000 to $75,000 mark.
- Global domino effect: Similar sell-offs and a spike in borrowing costs are already being seen in government bonds in Germany, France, Britain and Japan.
Although Wall Street does not expect an immediate default crisis, as buyers for the debt are still being found, the Federal Reserve under Kevin Warsh faces a huge test at the upcoming economic symposium in Jackson Hole. The federal government will urgently need to balance the fight against inflation with the risk of stifling economic growth.