Ex-Treasury chief warns of US bond crash, calls for contingency plan

Former Treasury Secretary Henry Paulson has urged US authorities to prepare a contingency plan for a potential future collapse in demand for US Treasurys, warning that the fallout would be “vicious.”

“We need an emergency break-the-glass plan, which is targeted and short-term, on the shelf, so it’s ready to go when we hit the wall,” Paulson told Bloomberg in an interview on Thursday.

“People say, when are you going to hit the wall? I obviously don’t know, it’s impossible to know. When we hit it, it will be vicious, so we have to prepare for that eventuality.”

The US Treasury market acts as the bedrock of the global financial system, serving as a “risk-free” benchmark with other assets, such as corporate bonds, mortgages, and stocks, being priced relative to Treasurys. Instability could cause ripple effects in the global economy.

For years, economists have warned of a potential “doom loop” where investors start demanding higher yields on Treasurys due to risks tied to the government’s burgeoning debts, which are currently more than $39 trillion.

This could cause an increase in interest payments, currently 4.3% on 10-year notes, which would widen the deficit. But if the Treasury cannot raise what it needs to pay interest, many assume the Federal Reserve would become the principal buyer, Bloomberg reported.

US national debt is almost $40 trillion. Source: USDebtClock

A double-edged sword for crypto

There could be several potential impacts on crypto markets if the $31 trillion US Treasury market were to melt down.

A Treasury market crisis could potentially trigger a flight to alternative stores of value such as Bitcoin () or gold. This may happen if the Fed is forced to monetize debt, stoking inflation fears and undermining confidence in the dollar.