Bond market nightmares

Yeah, that was alarming because US Treasuries are usually this safe haven in times of economic uncertainty. These bond market jitters reportedly spooked Trump so much that he paused some of his big tariff plans. And the scariness of what happened with Treasuries has actually stayed with us like the lingering dread you might feel after watching a horror movie.

I'm still sweating, Adrian. So today on the show, we confront our fears about the bond market. We enter a twilight zone of nightmare scenarios for US Treasuries. Come with us if you dare. After the break.

The U.S. treasury market is massive. We're talking almost $30 trillion worth of outstanding bonds. That's money the U.S. government has borrowed from investors. And it uses that money along with tax dollars to fund everything the government does.

Now, most of these bondholders are in the us, but investors all around the world are usually clamoring to hold U.S. treasuries. They know historically that the U.S. pays its debts on time and therefore investors don't demand a high interest rate from the US government. This is part of what's known as the US's exorbitant privilege.

Mark Williams is an economist at a firm called Capital Economics. It advises central banks and corporations on investment decisions. And Mark says investors healthy appetite for Treasuries keeps prices for these bonds high and interest rates for government debt low.

Last month the treasury market got a taste of what happens when this arrangement breaks down. Bond prices fell along with stocks and the dollar.

So what would happen if the bond market Got spooked again, maybe for longer. Now we are entering the twilight zone, a realm of the hypothetical where we confront our worst nightmares about U.S. treasuries.

Picture, if you will, a dim hallway with three doors. Each door leads to a scenario for U.S. debt behind door number one, what happens when investors do not want U.S. treasuries anymore?

There is some scary stuff happening here, okay? The U.S. treasury is trying to sell new bonds, but no one's showing up to buy them. And there are also investors who already own Treasuries who are dumping them. They're running away.

Whoa. Yeah. A version of this did play out. During last month's treasury market freakout. Rumors swirled about whether foreign central banks or governments were doing the selling.

Mark doesn't think foreign governments did much selling. This is because central banks typically act slowly. So that leaves private investors, like insurance companies or hedge funds as the ones who most likely got spooked.

And Mark says investors yanking their money is typically something you see happen to emerging economies, not the US The US

When investors flee Treasuries, interest rates on U.S. government debt go up, and that spells trouble for the government. That's according to Mitu Gholati. He's a law professor at the University of Virginia and an expert in what happens when governments can't pay their debts anymore.

Governments who need money can borrow it by selling bonds. That's usually what the US Does. It's like this revolving door where it borrows new money to pay older debts.

But in our bond nightmare scenario, investors are running away from Treasuries, so there aren't enough buyers for new government bonds.

Mitu also points out that the Trump administration is loathe to raise taxes and it doesn't want to fuel inflation by printing money.

One such creative solution lies behind door number two, and some investors would probably consider this a nightmare scenario. So this idea recently popped up in a paper written by Stephen Myron. He's the current chair of the White House's Council of Economic Advisers, which Means he has the President's ear.

Myren wrote this paper in November before he joined the administration, and in it he. He proposed a debt swap.

He said the US could approach foreign governments who are holding short term Treasuries. These would be bonds that come due in two or three years.

Oh, so there's no annual coupon payment. You just, you wait 100 years to get your money back?

Now, this is a very extreme option, something MeToo says would only happen if the treasury market were in shambles. And even proposing a debt swap would be tantamount to the US defaulting. It's basically admitting that the government needs more time to pay back its debts. And what investor would want to take that deal?

Well, this hypothetical nightmare actually gets worse, potentially.

Involuntary meaning the US government would just say to bondholders, this is happening whether you like it or not. That two year bond in your portfolio is now a hundred year bond.

And MeToo says the US government can do this because as far as he knows, there are no actual contracts for Treasuries. There are only regulations, and those can be changed.

I don't get a piece of paper with the terms on it.

For now, a US debt exchange is still highly unlikely. So let us turn our attention to door number three. Behind this door are what MeToo describes as more reasonable policy options for tackling the massive debt load.

Honestly, raising taxes is some people's worst nightmare, worse than anything else we've described here.

I would say the Trump administration's answer to that political question is kind of the opposite to promise tax cuts and increased spending.

Well, as we know, there's been massive cuts to the federal government, potentially more to come, but the administration wants to spend significantly more on defense and border border security. This episode was produced by Lily Kuros and engineered by Kwesi Lee. As fact checked by Sierra Juarez. Kicking Cannon edits the show and the indicator is a production of npr.