Summary of U.S. debt-related issues! Why are people selling U.S. debt? What consequences will the chain reaction after the maturity of U.S. debt cause?

Q: When bond yields go higher, will the government pay more?
A: The government issues bonds in the primary market. Once issued, the repayment amount is fixed. The so-called yield refers to the yield in the secondary market.

Because the transaction price in the secondary market is not fixed, the yield is also different. For example, when the government issues bonds, it will sell you a 100 bond at a discount of 95, and return you 100 at maturity, and the extra 5 yuan is considered interest.

In the secondary market, this bond may be traded at 96 or 94. The higher the transaction price, the lower the yield, and vice versa. The transaction price of a bond is inversely related to its yield. Long-term bonds pay interest at fixed periods and repay the principal at maturity, but the principle is the same.

Q: So, bond yields do not affect the government’s ability to repay its debts?
A: It would not have an impact, but the scale of US debt is too large, and it has exceeded 36 trillion so far. It is impossible to pay off such a large debt, and the only way is to borrow new money to repay the old debt. To borrow new money, you have to issue new bonds, and the interest you pay on new bonds cannot be lower than the yield in the secondary market, otherwise why wouldn't others buy in the secondary market, right? Therefore, it is best for the government to issue bonds in a low-interest environment

Q: How many bond markets are there?
A: The bond market is divided into primary and secondary markets. The primary market is where the government directly issues bonds for social financing, and the secondary market is where bondholders trade bonds with each other.

Q: What kind of environment can cause U.S. Treasury yields to fall?
A: If you want a simple and rough answer, then the Fed's interest rate cut will lead to a lower yield. But the yield of US Treasury bonds is not based on interest rate hikes or cuts, but on inflation expectations. If inflation expectations are high, the yield will often go higher.

If your yield is only 2% and inflation reaches 3%, then after deducting inflation, you will still lose money, right? So at this time, people often sell bonds, and selling = lower prices = higher yields.

However, one of the main functions of the Federal Reserve is to control inflation. When inflation expectations are high, it will often raise interest rates, so the general perception is that raising interest rates = higher yields.

It is not wrong, but it is an indirect logic. If the market believes that inflation has been controlled and will soon reverse, then even if there is still a rate hike cycle, the yield may fall (the logic of bottom fishing)

Another possibility is that the demand for risk aversion outweighs inflation. For example, if the environment in other countries is not good, capital will flow into the U.S. bond market for risk aversion (traditionally, U.S. bonds are zero-risk bonds), thereby lowering yields.

Q: Does Chuanzi meet these two conditions now?
A: Unfortunately, none of them are available. The tariff war has brought about very high inflation expectations, and in the context of industrial decoupling between China and the United States, the United States itself has become the biggest source of risk. Therefore, it is impossible for you to expect the U.S. bond yield to fall naturally.

Q: Is this why Chuanzi called on Bao Shifu to cut interest rates? To lower the yield rate so that he can issue bonds more easily?
A: He may really think so, but even if the interest rate is cut, it is hard to say how much effect it will have. I just said that the yield of government bonds is fundamentally based on inflation expectations and risk aversion demand. The interest rate cut will bring greater inflation expectations, and the released liquidity will most likely not stay in the United States. The recent triple kill of US stocks, bonds and currencies shows that capital is voting with its feet and fleeing the US market.

Q: So what if Chuanzi directly issues bonds at high interest rates? It's all borrowed money anyway, so at worst, you can borrow more later.

A: If there is really no other way in the end, this is of course a reality that you have to accept. But this is not without cost. As mentioned before, short-term bonds are paid with principal and interest upon maturity, while medium- and long-term bonds are paid with interest at regular intervals and the principal is returned upon maturity. Issuing high-interest bonds will increase the government's interest expenditure. Government revenue is limited. If you spend more on interest, you will have less on other expenditures. What can you do without money? Moreover, the more interest you pay now, the larger the amount of bonds you will issue next time. After all, the external acceptance of US debt has its limits. If no one takes over by then, then the only way out is default.

Q: If the Federal Reserve takes over, the Federal Reserve will print money itself. Are you afraid that it won’t be able to take over?
A: That's what you say, but the Fed can't take over directly. The United States has a Federal Reserve Act, which restricts the Fed from directly participating in the primary market and can only take over in the secondary market. In other words, the Fed cannot take over directly from the government, which is restricted by law. Therefore, it is necessary to find a buyer in the primary market. Now it is very close to the maturity of US bonds in June. It is impossible for Chuanzi to amend the legislation. There is no time. How will he operate? I also want to know

I have imagined some paths, such as using the government's white gloves to buy in the primary market and then reselling to the Federal Reserve, or the Federal Reserve directly providing loans to existing primary market buyers (Goldman Sachs, JPMorgan Chase, etc.) and buying in the secondary market. I only know that this Federal Reserve Act exists, and I haven't read the specific details. I don't know if these operations can be circumvented. I can only see the situation at that time.

Q: So there is a way to take over. So it's all right? Anyway, we will do it this way in the future. The 36 trillion yuan debt was not paid off overnight. It must have been handled many times before.

A: We can only say that there will be no debt default, but in the long run, money over-issuance is certain. With money over-issuance, can the dollar still remain strong? The U.S. debt problem is essentially the embodiment of the Triffin dilemma*. The need for dollar hegemony and the need to support unlimited debt expansion are fundamentally contradictory.

Therefore, when issuing U.S. debt, external buyers (foreign central banks and domestic institutions are also considered) will be given priority, rather than letting the Federal Reserve directly provide the guarantee. This way, the existing U.S. dollars in the market are used, temporarily mitigating the risk of excessive money supply. But how much can external buyers take? So this is a two-pronged approach. If the Federal Reserve does not provide the guarantee, debt defaults and U.S. debt dies suddenly. If the Federal Reserve provides the guarantee, money is over-issued and the U.S. dollar dies slowly. Of course, if you have to choose one, a slow death is better than a sudden death, which is better for everyone.

I have talked about this before. The biggest problem in the US stock market/cryptocurrency circle is not that there are no opportunities to make money, but that there are no certain assets that can be held with peace of mind. Because Trump changes his orders every day and is erratic, when everything slowly calms down, the bull market may come quietly. Often, the stronger the uncertainty, the more chaotic the market, the more panic, and the greater the opportunity!