It Started: America’s Bond Market Is Secretly Collapsing

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AMERICA’S DEBT PROBLEM IS GETTING STRANGER

Starting September 9th, the Treasury is set to double the amount of debt it buys back, which the script frames as the government effectively borrowing new money to help manage existing debt. The concern is that the U.S. is increasingly relying on more borrowing to deal with an already enormous debt load, raising the question of what happens when the solution to excessive debt becomes even more debt.

WHY TREASURY BUYBACKS MATTER

The government normally finances itself by issuing Treasury bonds, then issuing new debt when older debt matures. The problem is that inflation and higher rates mean investors are demanding greater returns to lend the government money. Treasury buybacks are intended to improve liquidity and absorb some unwanted older securities rather than allowing yields to rise uncontrollably. Critics argue this treats the symptoms rather than the underlying problem of rising debt, inflation, and weaker demand for government bonds.

KEVIN WARSH’S 5-PART FED PLAN

The script says new Fed Chair Kevin Warsh laid out five major themes at Jackson Hole. First, the Fed intends to communicate less and stop constantly signaling future moves. Second, it will allow markets to move independently and react afterward rather than guiding them in advance. Third, inflation must decisively return toward the Fed’s 2% target. Fourth, the economy remains strong enough to tolerate tighter policy, with unemployment around 4.1% and financial conditions not viewed as especially restrictive. Fifth, Warsh sees AI as a potentially historic productivity breakthrough that could fundamentally reshape economic growth.

SEPTEMBER COULD BRING MORE STOCK MARKET VOLATILITY

Despite higher rates, stocks and housing have remained relatively resilient. However, historically September has been one of the weakest months for stocks, with the script citing data showing positive returns only about 45% of the time and an average decline of roughly 0.6%. Possible explanations include tax-loss harvesting, investors raising cash and lower late-summer trading volumes. At the same time, weakness in September does not automatically mean a larger bear market, and historically the periods following midterm elections have often been considerably stronger.

THE NEXT BIG RISK IS INTEREST RATES

Markets are pricing in the possibility of another Fed rate hike while Treasury yields are already rising substantially on their own. The script argues that market-driven increases could potentially do some of the Fed’s tightening for it, reducing the need for an actual hike. The major level to watch is the 10-year Treasury yield approaching 5%, which is portrayed as an important psychological threshold that could begin creating larger problems throughout stocks, housing, borrowing costs and the broader economy.

A PULLBACK WOULDN’T NECESSARILY MEAN A CRASH

Even very strong stock-market years regularly experience significant declines along the way. Historical midterm-cycle data cited in the script is especially encouraging over longer periods, including the claim that the S&P 500 was higher one year after August 31 in 18 of the previous 19 midterm years. Because of that, a short-term 5–10% correction would not necessarily change the long-term outlook and could simply represent normal volatility.

HOW I’M PREPARING

Rather than making a major portfolio change, the strategy is to remain diversified and avoid reacting emotionally to short-term volatility. The portfolio described is roughly 55% stocks, 20% tax-free municipal bonds, 10% cryptocurrency through a Bitcoin ETF, with the remainder in real estate and other investments. If stocks fall substantially, additional cash could be invested, but there is no urgency to sell existing positions or aggressively buy while uncertainty remains elevated.

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