What would a US bond market crisis look like?

[Anonymous]

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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.

So debt dynamics are interesting. They are a function of the interest rate, the debt-to-gdp ratio, the inflation rate, the current deficit, and future deficits, as well as the global demand for US bonds. Moreover it is about perceptions of sustainability, not just the numbers. 15 percent might be sustainable when your nominal gdp growth rate is very high. But 7 percent would be unsustainable if your nominal growth rate is 5 percent and your fiscal policies are crazy (including potentially taxing foreign investors at high rates, as the current bill proposes).

I agree it would take a lot to dethrone the US bonds market. But this administration is brewing up the perfect storm of measures to do it. If they don’t, it will be because the Senate saves them.

So Dethrone in favor of what? That really is the question.

Also, Biden ran 2T deficit and no one cared, least of all the bond market.

I think this can go for a long time.

at least another 50 years.

Maybe. But to paraphrase Ernest Hemmingway, countries go bankrupt gradually, then suddenly. We are in the gradual stage. It is slow. The next stage will be very quick.

agree with this, that when it does happen, it will be sudden and violent.

[Anonymous]

Anonymous wrote:They’re banking on huge productivity gains from AI and other tech advancements to keep the GDP growing. If GDP stops increasing we’re screwed

In other words, sell me your only cow in exchange for this handful of magic beans. Doesn’t end well.

[Anonymous]

I was reading this article. It is based on a similar model that parts of the U.S. govt use to model our debt:
https://budgetmodel.wharton.upenn.edu/issues/2023/10/6/when-does-federal-debt-reach-unsustainable-levels

Currently based on having govt 97% debt to GDP as of Q1 2025, we are about 20 years away from a debt default situation. As we need to sell more and more bonds, the market will demand higher and higher interest rates to absorb the increased debt. Eventually we will be issuing so much debt that there are not enough takers and then the debt defaults as we are no longer able to pay off the existing loans with new loans.

We already saw a spike in bond rates this spring that scared a lot of people. The currently BB bill from congress will only make the situation worse.

My negative view is that Republicans will just look at this as a new wedge issue and/or use it as an excuse to reduce social security, increase retirement age, and increase taxes on social security. This already occurred in other countries.

[Anonymous]

What steps should we take with our finances to protect ourselves?

[Anonymous]

Anonymous wrote:What steps should we take with our finances to protect ourselves?

You can't, unless you can leave the US and move your money outside. All of us who don't have that option are exposed to sovereign debt failure risk.

[Anonymous]

Anonymous wrote:What steps should we take with our finances to protect ourselves?

There isn’t much you can do. When the global hegemon goes down, it takes down a lot with it. But avoid long-term US bonds, and tilt to foreign exposure and equities.

[Anonymous]

Well back in 1982 when rates shot up the older long term treasury bonds with low coupons value fell over 1/2 in value pretty quickly.

[Anonymous]

BYW you can buy Step Ups, Arms, Inverse Floaters, Convertibles or short the treasury index.