Finance leaders fear destructive U.S. debt scenario
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Aïda Amer/Axios
Hundreds of times a year, the U.S. Treasury auctions off debt securities — bills, bonds, and notes. This is how Uncle Sam borrows the billions needed to finance the government's deficits.
The big picture: Top financial and business leaders, including some who served at high levels in President Trump's first term, are increasingly worried that something could go awry.
- The fear is that not enough buyers will show up one day, resulting in a damaging loss of confidence and a spike in all Americans' borrowing costs.
- If that were to happen, leaders warn, it could cause lasting damage by shifting the entire U.S. economy into a new, higher interest-rate equilibrium.
What they're saying: "If you want an unpredictably wide swing in volatility, have a failed debt auction in the United States," Gary Cohn, a former Trump White House adviser and president of Goldman Sachs, said in a Reagan National Economic Forum panel Friday at the Reagan Library in Simi Valley, California.
- "We have the most robust debt market in the world until we don't," he said. "If there lacks interest from foreign investors, and there lacks interest from U.S. investors ... rates will move out dramatically."
- "One or two auctions later, you could be in a completely different system," said Cohn. "And then when the government gets to a point where it can't efficiently finance itself, we have a completely different position. And when we're there, it's almost too late to deal with."
- Speaking later Friday morning, JPMorgan CEO Jamie Dimon said that "you are going to see a crack in the bond market, OK?" adding, "It is going to happen."
- "If we don't have growth and we have these types of deficits, we're going to have an economic environment that's going to create real issues, and at some point, the bond market is going to have a problem with that," said Steven Mnuchin, Trump's first term Treasury secretary, later that day.
Zoom in: Former Speaker of the House Paul Ryan discussed the role that "primary dealers," the major financial institutions that play a crucial role in the auction process, would have in trying to arrest a failed auction.
- "We could see a day where ... we find out that the 25 primary dealers just filled 50% of the book because the auction was otherwise going to fail and we put a gun to their head and said 'Buy it all.'"
Yes, but: In that scenario, with the government strong-arming banks into buying Treasurys they don't want, things have gone horribly wrong.
What's next: House Financial Services Committee chair French Hill said that a task force led by U.S. Rep. Frank Lucas is examining questions about monetary policy and market resilience for Treasury securities.
- "What is the role of the Fed and the private sector in ensuring that we have adequate Treasury auction space?" Hill said.
- Lucas will be making recommendations on what Congress might do to strengthen the market's structure, said Hill.
Of note: The "big, beautiful bill" of tax and spending cuts making its way through Congress would increase fiscal deficits — and therefore bond issuance — by $3 trillion to $4 trillion relative to current law over the coming decade, per the Congressional Budget Office and private-sector modelers.
- In other words, the government will likely need to auction off considerably more Treasury securities if the bill is enacted.
