Tag: Bond market

Treasury bonds are auctioned by the Treasury department. It is an auction: banks say what rates they will accept, the ones who offer the lowest rate get the bonds. You can agree to buy bonds without bidding, in which case you just get whatever rate the auction sets.

So Treasury does not set the rates and say “take it or leave it.”

The rates for short term bonds are close to the Federal Reserve rate, longer term bonds can diverge a lot based on how much banks think the future is dangerous. After all if you’re locked in for five, ten or twenty years, and bond interest rates go up, you just took a bath relatively speaking. And since they probably went up because inflation went up, you could wind up with less real money than you started with. With short term bonds you can take a loss, but you aren’t stuck with it.

This is the primary market. The secondary market is FAR larger and is people selling bonds that already exist to each other. If interest rates go up, the price of existing bonds goes down, and vice-versa.

The largest holders of Treasury bonds outside of the US are Japan, China and the EU. If they sell a lot of bonds (and Japan is considering it) then for the usual reasons, the price will go down on bonds and that means interest rates need to rise in the next auction. If I can get bonds for cheaper, I’m not going to buy them off the primary market or from primary dealers.

Now there are banks who are required to buy bonds. First there are primary dealers, 25 of them: they have to bid. But they aren’t required to take the interest rates Treasury wants taken. As a rule they’ll try to be close to what Treasury wants, being a Primary Dealer is valuable, but they aren’t going to cut their throats.

The secondary market effectively determines the minimum interest rate that Primary Dealers can accept, because if they accepted less they’d be buying bonds worth less than bonds on the secondary market. They’re not going to eat billions of dollars of losses.

Next we have the fact that all US banks are essentially required to hold Treasuries as part of their liquidity requirements. Most assets count for liquidity, but only some assets are counted at 100%. Treasuries count, because the idea is that the Feds can always print money and therefore you are always sure to at least get your interest payments. The federal government cannot go bankrupt, so long as the US debt is denominated in dollars.

BUT as prices for bonds drop, which remember happens in inverse to interest rates on new bonds and also drop if there’s much more selling than buying on the secondary market, the value of the bonds that all these banks hold as their reserve requirement also drops.

So if Treasuries become a lot cheaper the banks suddenly can’t, en-masse, and for no fault of their own (this time) meet their liquidity requirements. And then you have a potential banking crisis.

Yes, the Fed could then step in and pull some arguably illegal shenanigans. But that has its own downsides. The bottom line is that if the world suddenly doesn’t want as many Treasuries as the debt and interest payments requires, the US has a real problem.

Go back to “as long as US debt is denominated in dollars”. A lot of counries can’t borrow in their own currency, or can’t borrow all the money they need. So they issue bonds denominated in other currencies, usually the US dollar.

If there isn’t enough demand for US bonds, then suddenly the US is in the same position. Bear in mind, even if I want exposure to the US, do I want it in Treasuries? After all, it’s the stock market that’s been super juicied, and if I think inflation is going to go up significantly, why buy Treasuries now? Why not wait?

But this where the rest of the current clusterfuck comes in. There’s every reason to believe that inflation will go up. A barrel of diesel is now selling for around $180 dollars. The Iran mess shows no end in sight. AI looks like a circle jerk bubble.

What happens if AI is a bubble and bursts at the same time as all this is going on?

Well that tanks the stock market. Suddenly foreigners want a lot less US dollars, since they don’t want as many US bonds or stocks.

If this happens, the US dollar starts falling. All assets owned in US dollars become worth less to everyone, foreigners and domestic, since the US dollar can buy less (remember, net importer.)

What we have right now is a perfect storm: the AI bubble, treasury bond problems, the Bank of Japan needing to sell treasuries to prop up the Yen, the Iran war. The US isn’t intervening to help Japan with the Yen out of the goodness of their own hearts, most of these people would sell their own kids into sex slavery if it’d help them get ahead. They’re doing so because if they don’t help Japan, Japan will help itself by selling potentially hundreds of billions of Treasuries in a short time.

If you’ve been following, you know that means that bond prices will drop and interest rates on new issues will have to go up and banks will become insolvent. It also will mean that a lot of other people will sell because they’ll get hit by margin calls as the value of their portfolio drops precipitously.

This is a real problem. It is not fake. And because it is a few problems: the Iran war, the carry trade, the AI bubble all at the same time, it’s very hard to manage.

If Trump had a lick of sense or wasn’t being blackmailed by Israel (or whatever the reason is) he’d end the damn war tomorrow and give Iran what is needed, because keeping the war going is risking the entire ball of wax.

Once the US loses dollar hegemony, it won’t get it back because most of the world hates it and Russia/China and others have been working hard to create SWIFT alternatives. Likewise if the US loses dollar hegemony most of the West can expect a huge hit to standards of living.

Dollar hegemony could have continued for another twenty years if the US had played nice with China and Russia, not abused sanctions, and not started stupid wars. Moving off has real costs and if the price of staying on wasn’t high, countries would have just gone along with it. But the US made unnecessary enemies and fucked around, and now it’s going to find out. If not during this crisis conflux, then the next, and there will be a next.

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Another Big Profit Opportunity For Elites Is On The Way (Bonds/Carry Trade)

By Ian Welsh

On August 19, 2026

22 Comments

Japan has, since the mid 90s, had very low interest rates. The Japanese carry trade was to borrow in Japan and invest in America. You didn’t even need to take any real risk. Borrow Japanese, buy safe bonds in the US that paid more. Or you could use the money for riskier bets.

This has been going on for more than half my life and I’m not young. It was one of those money spigots that insiders and wealthy people have access too, but most of the rest of us simply watch: free money for some.

Now it’s coming to an end. The Japanese Yen is under immense pressure and so far interventions have not done squat. So the Japanese are raising interest rates.

But more than that they’re selling large chunks of their US treasuries in interventions, and Japan is the largest holder of US government debt outside of America. (China is second.)

This happens at the same time as the US bond market is breaking. Treasury literally can’t sell all of its bonds. Rates are high, about at 2007 levels, and they’re selling short term bonds and using that to buy their own long term bonds.

Add to this issues with oil and distillates, especially diesel, the fact that the US military is basically out of a lot of weapons and has lost a war.

Then there’s the real-estate market:

America and Americans are under a lot of stress. Because interest rates are high and Biden and Trump love to spend but not tax there are also soaring interest payments on the US debt.

Now the big advantage the US has over most countries is that its debt is denominated in its own currency. The federal government cannot go bankrupt unless elites lose their will to print money, which so far they haven’t. They’ve printed literal trillions since 2008, though it’s concealed by pretending that Federal Reserve operations which create money out of mid air to keep rich people rich aren’t money printing.

The result was massive inflation in the top end, and a drying up of businesses aiming at the middle class and poor. You see this most clearly in Las Vegas, which used to have cheap rooms and food but now doesn’t, because why cater to people who have no money?

(In China prices are low, even at luxury hotels, because there is a mass market like the one the US had in the 50s and 60s.)

After all this add in the AI bubble and fertilizer and diesel shortages hitting farmers.

The entire system is cracking apart.

The smartest money isn’t the money that has been plunging into the AI bubble, it’s the people who have kept their powder dry, because as everything goes to hell, there will be significant buying opportunities. Warren Buffet, for example, built up a huge amount of cash, though his successor has spent some.

In a serious economic crisis, and one is coming, you can buy up companies and assets (and all those homes, which you then rent at profit maximizing rates which leave millions homeless) for cents on the dollar.

As for you, dear reader, well, probably you won’t be able to take advantage of this, any more than you could in the bounce after 2007.

The Federal Reserve and other central banks will have to decide whether or not to do bail outs, and whether or not to bail out the rich or ordinary people. They’ll choose the rich. But there is a problem with the whole “America’s debt is in dollars so it doesn’t matter theory.”

America’s a net importer. It has less and less to sell to the world that the world needs. There has been a slow but consistent move away from the US dollar as a reserve currency, a movement away from settling trade in US dollars and China’s now forcing companies to choose between America and China. If you enforce US sanctions, they’ll fine you and if you don’t pay, you’ll lose access to their market.

Ultimately the US dollar’s value comes from US strength: economically and militarily. Like the British Pound (which was once worth five times or more than the US dollar) it can be expected to lose value because there is simply less need for it. Everything you really need you can get somewhere else, unless like Europe, you’ve sanctioned other suppliers so much you’re destroying your own economy.

Anyway, all of these things all happening at the same time is all sorts of bad news. I’d expect some sort of financial crisis within a year and it will be a doozy. Wherever it starts it will hit everything in the US and Europe and the Anglosphere and much of the rest of the world. Central banks will have to spent trillions in another bail out.

But this will be the last major US bailout, because after this there will be nothing. The US will not have the tech lead in almost anything, is not creating the world’s future techs other than AI (which China is winning, anyway) and will have lost much of its military intimidation factor.

Welcome to the end of the American Empire. You’ll see it in food shortages, high prices and an elite determined to become an elite similar to India’s or much of South America’s: ruling over essentially poor nations, but filthy rich amongst the rubble.

The horizon is not so far as we can see, but as far as we can imagine

Tag: Bond market

Another Word On Treasury Bonds

Another Big Profit Opportunity For Elites Is On The Way (Bonds/Carry Trade)