US Panic: The Debt Bomb is Exploding (and they can't stop it)

0:00There is no recession. No bank has

0:02failed and no credit market has ceased.

0:06And yet, in the space of 3 weeks in

0:08August, the US Treasury committed to

0:11doubling the size of its long bond

0:13buybacks, floated the idea of dipping

0:15into a cash pile of $950 billion,

0:19and joined Japan in their first

0:21coordinated currency intervention since

0:241998.

0:26These are not regular maintenance tools.

0:29This is what a government reaches for

0:31when a market has stopped working. Now,

0:34Scott Bessent says all of this is about

0:36liquidity.

0:38What it actually is is a Treasury

0:40secretary standing in the market by

0:43himself, holding up the US bond market

0:46by hand because nobody else is willing

0:49to.

0:50And the bond market is already giving

0:51some very clear feedback. With long-term

0:54yields back to multi-decade highs above

0:57where they were in late July before any

1:00of this madness even began.

1:02So, today we look at what these

1:04emergency tools [music] actually are,

1:07why nobody wants to lend America money

1:09for the long term, and why the US

1:11government is using crisis level tools

1:14before we're even in a crisis.

1:17My name is Nick and this is The Finance

1:19Bureau.

1:22Okay, let's start with the thing that

1:24makes all of this so strange, the

1:27economy. Because on the surface, at

1:30least going by the stats and figures,

1:32nothing is wrong.

1:34Real GDP grew at an annualized 1.5% in

1:37the second quarter. Unemployment came in

1:40at 4.1% in the July release. CPI is

1:44running at 3.4% year-on-year, and the

1:47S&P 500 is hovering near record highs.

1:51So, we're not exactly in a 2008 scenario

1:55here, and it certainly isn't March 2020

1:57either.

1:58There's no failing institutions, no

2:00frozen funding markets, no real panic

2:03out there.

2:05Which is exactly why the government's

2:06official position was so easy to accept.

2:10The Treasury statement on the 19th of

2:11August said its plan for the larger bond

2:14buybacks reflects its desire to provide,

2:17quote, "greater liquidity support in

2:19longer dated nominal sectors where there

2:22is consistent strong sponsorship from

2:25market participants."

2:27So, the Treasury is saying the long end

2:29of the bond market just needs a little

2:31help functioning properly.

2:34Meanwhile, all the stats that I just

2:36covered say the economy is fine.

2:39But look beyond the official language

2:41and everything the Treasury has done

2:43since the start of August suggests

2:46something in the system is far from

2:48fine.

2:49So, which is it?

2:51Well, to answer that, let's take a

2:53closer look at what the Treasury has

2:56done.

2:57On the 5th of August, the Treasury

2:59published its routine quarterly funding

3:01plan and kept bond buybacks at their

3:04usual size. Then, just over a week

3:07later, a sale of 30-year government debt

3:10came in at the highest borrowing cost in

3:12decades.

3:14Long-term yields kept climbing from

3:16there, reaching levels not seen in

3:18roughly 20 years.

3:20And on the 18th, the national debt

3:22crossed $40 trillion.

3:25And from there, things really stopped

3:27resembling anything routine.

3:30On the 19th of August, uh 2 weeks after

3:32publishing that refunding schedule, the

3:35Treasury tore it up.

3:37Per operation buybacks in long-dated

3:39buckets went from a $2 billion maximum

3:42to at least a $4 billion

3:44running from the 9th of September to the

3:464th of November.

3:48Barclays put the expanded program at

3:51somewhere around $64 billion a year,

3:54roughly 15% of all 20 and 30 year

3:57supply.

3:58And this from a department whose entire

4:01institutional religion has been, in its

4:04own words, regular and predictable.

4:07And then it escalated again, because on

4:10CNBC on the following days, Besant said

4:13operations could be more than the $4

4:15billion per issue, turning the number

4:18from a ceiling into a floor.

4:21And then, on the 24th of August, it was

4:23reported that the department was

4:25considering tapping the Treasury General

4:27Account to fund bigger buybacks still.

4:31And that account is somewhere near $950

4:34billion

4:35against a prior operating target nearer

4:38$600 billion.

4:40So, three major steps of escalation in

4:43just six days, each one larger than the

4:46next.

4:47But at this stage, it's worth

4:48considering what a buyback actually is,

4:51because it's important.

4:53In simple terms, the government goes

4:55into the secondary market and buys back

4:57bonds it already issued from investors

5:00who want out. Which means it only exists

5:04as an operation because the people

5:06holding the paper want to sell and there

5:09aren't enough buyers on the other side.

5:12Besant's description of the plan was

5:14that the Treasury is going to, quote,

5:16"make a market in these." And you only

5:19need to make a market where there isn't

5:22a market.

5:23Now, just to be clear, guys, in case

5:25there's any confusion, this isn't

5:28quantitative easing. Uh the Fed's

5:29balance sheet doesn't grow in the

5:31scenario and no new base money is being

5:34created. The Treasury funds the

5:36repurchases by issuing more short-term

5:39bills instead, a maneuver Besant himself

5:42calls the Treasury twist.

5:45So, the long bonds come in, uh the short

5:47bills go out, and the average maturity

5:50of the national debt gets shorter. Now,

5:53a measure like this would be notable

5:54enough, but the fact that it came just

5:56weeks after a record currency

5:58intervention should be setting off alarm

6:01bells. Because governments do not

6:04intervene in foreign exchange casually.

6:07Back in mid-July, the dollar hit 164 to

6:11the yen, the weakest the yen had been in

6:13about four decades. On the 30th and 31st

6:17of July, Japan's Ministry of Finance

6:19conducted its largest two-day

6:21intervention in around 15 years, with

6:25estimates of the size ranging anywhere

6:27from 50 billion to 89 billion dollars.

6:31And then, on the 31st of July, a Reuters

6:34photographer at Camp David caught

6:37Bessant's notepad. It read, "To do, buy

6:41Japanese yen, 5 to 10 billion."

6:45And by the 3rd of August, Japan's

6:47Finance Minister Satsuki Katayama and

6:50Bessant had formally confirmed a joint

6:52operation. Bessant's public line was

6:55that he coordinated foreign exchange

6:57actions countered disorderly yen

7:00movements, and that the Treasury {quote}

7:02"will not hesitate to participate in

7:05further joint intervention."

7:07But the exact approach the US took here

7:09is really noteworthy. The New York Fed

7:12sold euros out of the Exchange

7:14Stabilization Fund to buy the yen,

7:17rather than dollars. And the reason it

7:19was done that way is important. Selling

7:23dollars would have pushed Japan toward

7:25liquidating US Treasuries to raise the

7:27currency, which would have driven

7:28American long yields even higher. So,

7:32Japan was instead pointed at the Fed's

7:34FEMA repo facility, where it could

7:37borrow dollars [clears throat] against

7:38its Treasuries rather than selling them.

7:41So, two arms of the US government spent

7:44late July engineering a currency rescue

7:47designed to avoid triggering a bond

7:49sale. The last time the United States

7:52and Japan intervened together to buy the

7:54yen was 1998.

7:57The American leg then was about $2

7:59billion

8:00with the yen having slumped past 146 to

8:03the dollar.

8:04The backdrop was the Asian financial

8:06crisis in full swing with a collapse in

8:09yen threatening to destroy the export

8:11competitiveness of half the region and

8:14pressure China into devaluing the yuan.

8:18Two months later, Russia defaulted.

8:20Shortly after that, Long-Term Capital

8:22Management nearly took the system with

8:25it.

8:26And that's the environment these tools

8:28were last used in.

8:30So, Besant is using the 1998 instrument

8:34in a year where there's apparently no

8:36crisis.

8:37But then, why does the long end of the

8:40bond market need holding up at all?

8:43Well, because the people who used to buy

8:45it have walked away.

8:48For decades, 30-year Treasuries were

8:50absorbed by what you'd call patient

8:52money.

8:53Foreign central banks recycling trade

8:56surpluses, pension funds and life

8:58insurers matching long-term liabilities.

9:01Buyers who don't care much about the

9:03price because they need these long-dated

9:05bonds.

9:07And that's the money that's leaving.

9:09The Treasury's international capital

9:11data for June showed total foreign

9:13holdings falling $72 billion in a single

9:17month.

9:18Japan, the largest foreign holder, cut

9:21over $26 billion.

9:23China cut $25.9 billion,

9:26which is its lowest holding since

9:29September 2008.

9:31And net monthly cross-border inflows

9:34into Treasuries collapsed from $56

9:36billion in May to just $6.8 billion in

9:40June.

9:41You can see the same thing in the

9:43auctions because the 30-year Treasury

9:46auction in August attracted a weaker

9:48demand than usual, leaving Wall Street

9:50dealers having to absorb a larger share

9:53of the bonds themselves.

9:55Meanwhile, a two-year Treasury auction

9:57around the same time saw some of the

10:00strongest overseas demand in more than a

10:02year.

10:03So, the world still wants to lend

10:05America money, just not for 30 years.

10:10And remember, guys, this is not about

10:11the Fed because the Fed's fund rate has

10:14sat in a 3.5 to 3.75% range all year.

10:18What's moved is the term premium, and

10:21that's the extra yield investors demand

10:24purely for the risk of holding debt for

10:26the long term.

10:28Strategists reckon that term premium

10:30expansion accounts for roughly 2/3 of

10:33the move in the long rates.

10:35But in simpler terms,

10:37the long end is pricing the next 30

10:39years of American fiscal behavior, and

10:42that costs well above 5% in the current

10:45environment.

10:46The government doesn't like paying that,

10:48of course, but that's what the market

10:51dictates.

10:53Now, following bond markets and capital

10:55flow data takes an absurd amount of time

10:58for any one person, which is exactly why

11:01you should make it easier for yourself

11:03by signing up for the Finance Feeder

11:05newsletter. It's completely free, and

11:07each week we break down policy and money

11:10flows that end up moving your portfolio.

11:13Just click the link in the description

11:14or scan this QR code on the left of your

11:17screen to get started.

11:19Right-o. Back to the Treasury because

11:22it's time to look at some hard numbers.

11:26US debt hit that $40 trillion number

11:29about five months after a $39 trillion

11:32number, which itself was reached about 5

11:34months after a $38 trillion number.

11:37That's an accumulation pace near $7

11:40billion a day.

11:42The CBO has revised the fiscal 2026

11:45deficit up to about $2.1 trillion,

11:48some $200 billion above its February

11:51estimate.

11:53And the net interest has now passed $1

11:55trillion a year, running over $3 billion

11:59every single day. As a share of the

12:02economy, that's roughly 3.3% of GDP, the

12:05highest since federal records began in

12:081940.

12:10Interest now eats something close to 15%

12:13of all federal spending, up from 5.2% in

12:172021. The US government now spends more

12:20servicing its debt than it does on

12:22national defense.

12:24There's no sugarcoating it.

12:26These numbers are dire.

12:29Now, to pay that interest, the Treasury

12:31must issue more debt.

12:34And to place that debt with buyers who

12:36are already backing away, it must accept

12:38higher yields. Higher yields raise the

12:41interest bill, which requires more

12:44issuance.

12:45There is no step in that loop where the

12:47Treasury sells fewer bonds, which is why

12:50the only lever left was to start buying

12:53its own.

12:55So, did it work?

12:58Well, we have the answer, and it took

13:00about a day.

13:02On the 19th of August, the Treasury's

13:03announcement knocked long-term yields

13:06down by more than 10 basis points.

13:09By the 20th, almost all of that move had

13:12been reversed.

13:13And within days, the 30-year yield had

13:16pushed to a fresh multi-decade high, a

13:19full round trip and then higher than

13:21where it started.

13:23Yikes.

13:24And the people who know these markets

13:26best said it very well.

13:29Legendary trader Stanley Druckenmiller,

13:31who just so happens to be Scott

13:33Bessent's old boss, wrote that this

13:35operation was, {quote} "price management

13:38and a mistake far larger than a $4

13:41billion would suggest."

13:43He added that governments which fight

13:45market fundamentals always lose, and

13:48that if the 30-year has to trade at 5.5%

13:51to clear, that's just the market.

13:55Mark Sobel, a former Treasury official,

13:57called it akin to spitting into a

13:59gale-force wind.

14:02James Sullivan at J.P. Morgan compared

14:04swapping long bonds for short bills to

14:07paying your mortgage with your credit

14:09card.

14:10And Citadel Securities even used the

14:12term financial repression, warning about

14:15the dollar's future, which,

14:17incidentally, is down over the month

14:20while gold has been soaring.

14:23Now, when you reduce all of this down, a

14:25government facing a long-term bond

14:27market it can't control has only three

14:30courses of action.

14:32One, grow faster than the interest rate,

14:35which is the official plan, but requires

14:38sustained real growth above borrowing

14:40costs that nobody in the developed world

14:42is currently managing.

14:44Two, buy the bonds yourself, which is

14:47where we are.

14:48But even tens of billions of dollars in

14:51buybacks barely moves the needle against

14:53America's $40 trillion debt pile.

14:57And three, keep yields below inflation

15:00long enough for the debt to shrink in

15:02real terms, something officials will

15:04never announce, but more and more people

15:06are expecting.

15:08But, of course,

15:09which path we get largely depends on

15:12what happens to the 30-year bond market.

15:15Bessent may be confident that he can

15:17bend markets to his will, but markets

15:20have a habit of punishing that kind of

15:22hubris.

15:24An emergency would imply something broke

15:26in the system, but nothing has broken,

15:28at least by the official stats. Growth

15:31is positive, employment is ordinary, and

15:33equities are at record highs.

15:36But in that month, the US doubled its

15:39bond repurchases, floated rating a near

15:42trillion-dollar cash reserve to buy

15:44more, and intervened in a foreign

15:46currency for the first time in 28 years.

15:50A government is not supposed to need the

15:51crisis toolkit when there is no crisis.

15:55If that's the cost of a normal month,

15:57then I'd hate to see a bad one.

16:01Well, that's all about we have time for

16:03today, guys, but what do you think? Is

16:06Bullard running a standard liquidity

16:08operation, or is he standing in as the

16:11last buyer of resort for the 30-year

16:14American debt because nobody else will?

16:17Let me know your thoughts in the

16:18comments down below.

16:20And if you want to understand why

16:21foreign central banks have been steadily

16:23cutting their treasury holdings and what

16:25they're now buying instead, then you can

16:28check out our video on that right over

16:30here.

16:31As always, thank you very much for

16:33watching, and I'll see you in the next

16:35video. This is Nick, signing off.