What would a US bond market crisis look like?

[Anonymous]

With deficits and government debt skyrocketing, exacerbated by continuation of tax cuts, we’re hearing more handwringing about a crisis in the bond markets. For those who are more savvy about macroeconomics, what would a bond market crisis look like here in the US, and what would be the effect on normal, middle class citizens? I know the story of the Argentine default in the 1990s, but the US economy is orders of magnitude larger, so I don’t know if that’s a good model.

[Anonymous]

No one knows but you could look at the UK where basically they can’t afford to provide any govt services but also can’t cut taxes and interest rates are high.

[Anonymous]

Massive inflation.

If the bond market requires more debt than the U.S. can get ahold of or if payments get difficult for the government, the government can always dig its way out by forcing inflation, printing copious amounts of money and thus devaluing the amount of debt that the government is holding.

[Anonymous]

The dismantling of the US government and the erratic foreign trade policy have caused the major foreign creditors to lose faith in the stability of the US economy and government. They are pulling out of the US.
--> the USD is no longer the preferred reserve currency
--> Interest on US bonds is skyrocketing
--> it will be more and more expensive to service the debt
--> services will be cut, taxes stay high, the government will print a lot more money, causing high inflation
--> savings will become worthless
--> everybody will be poorer except for the very rich

[Anonymous]

Anonymous wrote:With deficits and government debt skyrocketing, exacerbated by continuation of tax cuts, we’re hearing more handwringing about a crisis in the bond markets. For those who are more savvy about macroeconomics, what would a bond market crisis look like here in the US, and what would be the effect on normal, middle class citizens? I know the story of the Argentine default in the 1990s, but the US economy is orders of magnitude larger, so I don’t know if that’s a good model.

The bond market was fine with that. It was the self own of tariffs and DOGE that worry it.

[Anonymous]

Check this out for an idea what can happen to our bond market:

“UK Gilt Market Crisis of 2022”. Very similar to what is currently being proposed for taxes and cuts in the BBB that got passed in the house.

[Anonymous]

Agrentina

[Anonymous]

Bond yields rise and dollar falls. Inflation increases. At that point it depends on the fiscal policy response. Higher yields increases government borrowing costs and hence the deficit. If they take credible action to contain the deficit then the situation stabilizes. If not we enter a negative spiral that involves the same elements of rising interest rates, spiraling deficits, falling dollar, increasing inflation etc.

[Anonymous]

We will purposely tank the world economy as well. The US will never let it economy tank while the rest of the world thrive no way.

[Anonymous]

Anonymous wrote:We will purposely tank the world economy as well. The US will never let it economy tank while the rest of the world thrive no way.

It's not really about "letting" the rest of the world thrive. If the US has an economic crisis, the rest of the world would be negatively impacted regardless of any effort on the part of our policy makers.

[Anonymous]

It will be a bad year next year. So many people are still on severance right now that the unemployment numbers aren't very accurate. Feds alone have gotten rid of hundreds of thousands of people, plus even more contractors. So that means all those are down to one income, or less income than before. Just a big contraction in the whole economy.

[Anonymous]

Anonymous wrote:Bond yields rise and dollar falls. Inflation increases. At that point it depends on the fiscal policy response. Higher yields increases government borrowing costs and hence the deficit. If they take credible action to contain the deficit then the situation stabilizes. If not we enter a negative spiral that involves the same elements of rising interest rates, spiraling deficits, falling dollar, increasing inflation etc.

This is the theory, but present day reality is the opposite as far as bond yields go. Even w/ the “big beautiful bill” expected to add trillions to the total debt, rates are lower compared to Jan. 1. There is no panic in the bond market. Go figure.

[Anonymous]

Anonymous wrote:Check this out for an idea what can happen to our bond market:

“UK Gilt Market Crisis of 2022”. Very similar to what is currently being proposed for taxes and cuts in the BBB that got passed in the house.

Interesting. The UK's 45 day prime minister recently wrote an op-ed in the WSJ claiming Trump is on the right track and if only voters in the UK Z hadn't booted her out they would be in a golden age.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Bond yields rise and dollar falls. Inflation increases. At that point it depends on the fiscal policy response. Higher yields increases government borrowing costs and hence the deficit. If they take credible action to contain the deficit then the situation stabilizes. If not we enter a negative spiral that involves the same elements of rising interest rates, spiraling deficits, falling dollar, increasing inflation etc.

This is the theory, but present day reality is the opposite as far as bond yields go. Even w/ the “big beautiful bill” expected to add trillions to the total debt, rates are lower compared to Jan. 1. There is no panic in the bond market. Go figure.

I suspect that it means that the market doesn’t think the bill will be passed as is. There is also some move to bonds as nervousness about equities persists. Look at how the cost of credit default swaps on US government debt have increased for evidence that all isn’t well in the bond market.

But I don’t disagree with you. The point is that it is an unstable equilibrium. Once things start moving, they could move quickly.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Bond yields rise and dollar falls. Inflation increases. At that point it depends on the fiscal policy response. Higher yields increases government borrowing costs and hence the deficit. If they take credible action to contain the deficit then the situation stabilizes. If not we enter a negative spiral that involves the same elements of rising interest rates, spiraling deficits, falling dollar, increasing inflation etc.

This is the theory, but present day reality is the opposite as far as bond yields go. Even w/ the “big beautiful bill” expected to add trillions to the total debt, rates are lower compared to Jan. 1. There is no panic in the bond market. Go figure.

I suspect that it means that the market doesn’t think the bill will be passed as is. There is also some move to bonds as nervousness about equities persists. Look at how the cost of credit default swaps on US government debt have increased for evidence that all isn’t well in the bond market.

But I don’t disagree with you. The point is that it is an unstable equilibrium. Once things start moving, they could move quickly.

Rates have been a lot higher in the past, and no one thought that it was unstable. If you drew line through the middle of the 10yr over time, it would about 6-7%. No one thought that was unstable, and it has been even higher than that.

And there really is nothing to replace the US Treasury bond market, it’s to deep and trades 6 days a week all hours of the day. There is no bond market or currency on par w/ the US. No one is ever going to hold their wealth in Chinese bonds, and the EP countries are too small.