Former Treasury Secretary Henry Paulson urged US authorities to prepare a contingency plan for a potential future collapse in demand for US Treasuries, warning that the impact would be “cruel”.
“We need a contingency plan to break the glass that is focused and short-term and kept on the shelf so that it is ready to use when we hit the wall” – Paulson he said Bloomberg in an interview on Thursday.
“People say: when are you going to hit the wall? Of course, I don’t know, there’s no way to know. When we hit it, it’s going to be brutal, so we have to prepare for that eventuality.”
The U.S. Treasury bond market underpins the global financial system, serving as a “risk-free” benchmark for other assets such as corporate bonds, mortgages and stocks to be priced relative to Treasuries. Instability can have perverse effects on the global economy.
Economists have warned for years of a potential “doom loop” in which investors would demand higher Treasury yields because of the risks associated with rising government debt, which now stands at more than 39 trillion dollars.
This may result in an escalate in interest payments, Currently 4.3% in the case of 10-year bonds, which would deepen the deficit. However, if the Treasury is unable to raise the amount needed to pay the interest, many assume the Federal Reserve will become the primary buyer, Bloomberg reports.
A double-edged sword for cryptocurrencies
There could be several potential impacts on cryptocurrency markets if the $31 trillion U.S. Treasury bond market melts.
A crisis in the treasury market could potentially trigger a flight to alternative sources of value, such as Bitcoin (BTC) or gold. This could happen if the Fed is forced to monetize debt, fueling inflation fears and undermining confidence in the dollar.
However, the world’s largest stablecoin issuer, Tether, is primarily backed by treasuries, with 63% of its total reserves made up of US treasury bills and 10% of overnight reverse repurchase agreements. According to to the Tether transparency report.
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Research manager at trading platform Bitrue, Andri Fauzan Adziima, told Cointelegraph that this remains a “macro risk on the watchlist,” but if it does happen, there could be short-term pain in the form of “a rapid rise in yields, lower global liquidity and risk-free selling, which hits BTC and altcoins hard while increasing risks for stablecoins.”
“Tether itself holds more than $120 billion in Treasuries, making it vulnerable to a run or collapse if confidence erodes and it faces fire-selling pressures.”
However, in the longer term, it could “accelerate the flight to non-sovereign stores of value, positioning Bitcoin as ‘digital gold’ amid erosion of confidence in US debt/dollar dominance.”
A potentially positive scenario would be if the crisis highlights fiat vulnerabilities without an immediate systemic collapse, he said.
The U.S. Treasury is conducting the largest debt buyout yet
The U.S. Treasury conducted its largest single debt buyout on Thursday, accepting $15 billion of senior securities maturing in 2026-2028.
Such redemptions escalate Treasury market liquidity by withdrawing lower-volume bonds and providing liquidity and cash to holders who can move them elsewhere in the financial system.
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