The U.S. government's strategy to ease pressure in the Treasury market, primarily through bond buybacks, offers only temporary relief and risks postponing a larger debt crisis, according to James Sullivan, JPMorgan's co-head of global fundamental research.
Sullivan articulates a stark analogy: the U.S. Treasury's current approach—buying back longer-duration bonds and issuing shorter-dated bills—is akin to "paying your mortgage with your credit card." While it might provide immediate liquidity, it fails to address the escalating underlying debt burden, merely shifting the problem into the future.
The U.S. Treasury Department, under Secretary Scott Bessent, announced an increase in its government debt buybacks, set to begin September 9 and run until November 4. This intervention aims to manage borrowing costs in the short term, but Sullivan cautions against governments attempting to control markets, suggesting it rarely ends well.
The scale of the challenge is immense. The U.S. government alone holds approximately $40 trillion in debt, contributing to a staggering $76 trillion across developed markets globally. Adding to this, corporate bond issuance has reached record highs, fueled by capital-intensive sectors like artificial intelligence infrastructure, reshoring initiatives, and national security investments. Leading AI companies, for instance, have issued $200 billion in debt this year, an 80% increase from the previous year.
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This surge in debt supply clashes with a weakening foreign demand for U.S. government bonds. China's holdings of Treasurys have hit an 18-year low, and foreign government custody holdings of U.S. Treasurys are at their lowest in 14 years. As Sullivan emphasizes, "The only way you balance supply and demand is through price," implying a necessity for higher yields to attract buyers.
The repercussions extend beyond the bond market to equities. With bond yields now surpassing the earnings yield on the S&P 500, investors face increasingly complex asset-allocation decisions. The competitive landscape between fixed-income assets and potentially overvalued stocks intensifies, making strategic investment choices more challenging in the evolving market environment.
