The US Treasury bond market could be on the brink of complete collapse.
This $27 trillion financial asset, roughly the size of entire US GDP, could trigger catastrophic economic consequences if it breaks down.
Treasury bond prices have already fallen 50% since 2020, reshaping the financial system.
We’re potentially at risk of another move down with even deeper consequences.
The current administration has torn apart every single long-standing trade partnership with foreign governments globally.
These foreign governments are holders of US Treasury debt, representing about 30% of current outstanding debt.
What happens if these foreign holders realize they don’t trust US government debt enough to keep holding it and begin selling?
The Treasury bond market works on supply and demand.
If foreign entities lose trust:
- Demand reduces as they stop buying new US debt
- Supply increases as they sell the debt they own
This concept is called “foreign dumping.”
While the theory has existed for years, it’s never materialized because the world trusted the US government.
Recent data shows foreign holdings increased in February.
But, that was before Liberation Day on April 2nd when Trump cut major trade ties.
April 2025 could be a major turning point for foreign holdings.
Foreign dumping is just the tip of the iceberg covered by media.
The real forces driving this market are actually happening underneath the surface.
Since the 2008 financial crisis, the federal government has run at least $500 billion deficits.
Since the pandemic, it’s been at least $1 trillion yearly deficits.
This is the difference between what the government earns through taxes and spends.
Clearly, it’s spending much more than it earns.
The deficit for 2025 is projected at $1.9 trillion, getting worse in coming years due to structural forces pushing higher spending.
To finance these deficits, the government must borrow through issuing Treasury bonds to private investors, institutions, banks, foreign investors, and governments.
The government has already issued record amounts of Treasury bonds over the past 5 years and will continue doing so.
This oversupply will likely push down prices.
There’s another factor at play that will significantly increase the supply of Treasury bonds…
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The Maturity Wall
In 2025, about $7 trillion worth of government debt comes due.
The only way to pay this back is refinancing – borrowing more debt to pay back debt coming due this year.
Combined with the record deficit, this will flood the market with huge supply of new Treasury bonds, putting significant downward pressure on prices.
How Much Lower Can They Go?
Treasury bonds have been the worst-performing asset over 5 years, plummeting 50% since 2020.
Are current prices accounting for all these risks?
For that we need to look at demand.
Demand depends on whether investors see an attractive return for the risk.
Right now, returns don’t compensate for ownership risks.
We can see this through something called the “Term Premium” of Treasury bonds.
This is the extra return for holding long-duration bonds like the 10, 20, or 30-year Treasury.
It plays a big role in determining the total yield.
A high term premium means investors see bonds as risky and demand higher yields.
A low term premium means investors don’t believe longer-duration bonds are risky.
Throughout history, term premium stayed between 1% and 2%.
Today it stands at 0%, meaning holders aren’t being compensated for risk.
We’d need at least 1.5% term premium (the 50-year average) to reflect all risks present today.
This jump could push yields from 4.8% today to 6%.
This would be devastating for Treasury bond prices since rising yields accompany proportional price declines.
A yield move from 4.8% to 6% could trigger 25-30% price drops in Treasury bonds.
This kind of a move would have serious consequences.
Treasury yields are the benchmark for borrowing across the economy.
Higher yields mean higher rates for corporations and a hit to economic growth.
It also means higher mortgage rates, further locking Americans out of an already unaffordable housing market.
All of this would dramatically increase the odds of a recession!
We truly hope our concerns are wrong because if this plays out, the fallout could be severe.
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