Tail Wagging the Dog Before the Next Bond Storm

Lurking behind a surge in United States government bond yields since the spring of this year are the two largest players in the market that have stopped buying U.S. Treasury debt. The Federal Reserve launched a quantitative tightening (QT) monetary policy program in March 2022 that resulted in interest rate hikes at an unprecedented pace with the current effective Fed Funds Rate at 5.33%. This allowed maturing debt to drop from its $8.9 trillion balance sheet peak in July 2022 down to $7.9 trillion as of last week. China has rapidly reduced its Treasury holdings since 2021. It’s been lowered by a total of $500 billion since 2014, which adds China to the net seller category. Foreign central banks usually purchase short-term bonds for dollar reserves to achieve policy goals no matter what the yields are because they’re not a long-term safe haven investment such as gold reserve holdings.

Speed of U.S. Interest Rate Hikes 1983-2022 - Statista

Speed of U.S. Interest Rate Hikes 1983-2022 – Statista


China Treasury Holdings 2009-2023

China Treasury Holdings 2009 Thru Sep. 2023 – Otavio (Tavi) Costa


Fed Balance Sheet - FRED, Oct. 12, 2023

Fed Balance Sheet – FRED, Oct. 12


Estimated World Gold Reserve Holdings 2Q23

Estimated World Gold Reserve Holdings 2Q23 – Jan Nieuwenhuijs


The reversal in the purchasing of U.S. sovereign debt matters because the dogs in China and the U.S. have bought trillions of dollars in U.S. Treasury bonds over the last two decades, and it served as a backstop (aka the Greenspan Put) to finance huge deficits that arose after the Great Financial Crisis (GFC) and COVID pandemic panic. That dynamic has shifted in a deleterious way after financial sanctions were imposed upon Russia by the collective West over the war in Ukraine, which has accelerated a de-dollarization trend with BRICS+ countries leading the way. No matter what geopolitical and global trade factors are influencing the move away from dollar hegemony, the bottom line is that the Fed and China are no longer big buyers of U.S. sovereign debt.

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Without the Fed and China’s seemingly endless currency printing, sources of demand for U.S. bonds must be replaced and may lead to higher yields, liquidity issues, inflationary pressures, more incompetent fiscal governance on Capitol Hill, and increasing risk of debt default, which all prompted the Fitch rating agency to downgrade the U.S. credit rating and Moody’s warning that the U.S. could lose its last AAA rating sooner than later. With a U.S. debt-to-GDP ratio already trending at around 120%, the next bond storm could occur within months instead of years.

Sovereign Risk With and Without Biden

Sovereign Risk With and Without Biden


Geopolitical Risks May Accelerate A Debt Crisis… “The United States government is counting on rising global demand for US dollars to offset the increased fiscal imbalances and on the Fed to change its monetary policy if needed. This is a dangerous bet when China, Saudi Arabia, and other nations’ Treasury holdings are dropping to multi-year lows. It is also extremely imprudent to believe that the world will absorb the United States’ fiscal imbalances at any cost in the middle of a global geopolitical conflict. Furthermore, it is reckless to believe that the Federal Reserve will buy all the Treasury bonds required when the central bank is already loss-making… The United States’ fiscal imbalances are enormous, but so are the deficit levels of many other developed nations, and the combination of rising rates, losses at the central bank, and impending giant maturity walls happen.” – Daniel Lacalle, Oct. 15


US bond market is losing its strategic footing… “Last week’s unusual turbulence in US Treasuries points to a deeper issue than just the latest reading of the runes on inflation and the interest rate intentions of the Federal Reserve. The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects.” – Mohamed El-Erian at the Financial Times, Oct. 17

Treasury Secretary Janet Yellen believes the U.S. can “certainly” afford military war support for both Israel and Ukraine. I guess all is good if Janet says so. Unfortunately, the math does not add up, and a deluge of U.S. debt issuance is slated to flood the bond market in 2024 to finance our government that’s devoid of a debt ceiling and fiscal responsibility. It was recently revealed that the clown show in D.C. spent $3.3 billion on a furniture splurge during the pandemic to refurbish government offices with luxurious leather chairs and solar-powered picnic tables.

JPMorgan CEO Jamie Dimon chimed in last week with the bank’s 3Q23 earnings news release that included a warning that we’re in “the most dangerous time” for the world in decades. His concern goes beyond the geopolitical chaos and military conflicts we’ve been facing since the Biden administration settled into the White House. Dimon’s biggest fear is the insane level of national debt along with “the largest peacetime fiscal deficits ever.” A failed Treasury auction that slammed the brakes on Goldilocks last week could be a warning signal from the debt market. There is also a derivatives time bomb that’s teetering on a collapse.


The U.S. Treasury must issue new bonds to cover a $2 trillion deficit, and an additional $7.6 trillion matures next year. That adds up to roughly $9.6 trillion in new debt at higher rates that somebody must buy for the U.S. to remain in business but still bankrupt. Interest due on the national debt is rapidly approaching $1 trillion by the end of this year. Nearly a third of all outstanding U.S. debt matures next year. Note that debt service costs have more than doubled since the original debt was issued, which means the price to maintain our national debt will be 2-3x as expensive at the current yields. $2 trillion in annual interest payments on the debt are coming fast while WW3 is brewing on our doorstep.

Treasury Debt Outstanding by Maturity

Treasury Debt Outstanding by Maturity


Get prepared by having your financial house and pantry in order. Even if the Fed lowers interest rates and buys up the unwanted debt in a bond storm, that only worsens the underlying credit crisis and eventual outcome instead of ripping off the Band-Aids sooner.

‘The Idiot Class’: Rep. David Schweikert Hammers Colleagues Over Spending – Sep. 2023


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Tail Wagging the Dog Before the Next Bond Storm

Tail Wagging the Dog Before the Next Bond Storm