The collapse in Treasury bonds now ranks among worst market crashes in history (2024)

I always have a hard time keeping track of what goes up and what goes down with bonds, so writing this down mostly for myself:

The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate. (In between Treasury sales, there's an open market of people selling their bonds to each other, which hints at what the Treasury will pay next time.)

So a price crash means that the bonds are cheaper, which means that the Fed will get less money when they sell the bonds. It means that interest rates are higher, costing the Federal government more money for the same amount of debt.

The Federal Reserve has its own interest rate, which in turn sets the rates that other banks will require for loans. They set that high when inflation is high, which encourages selling Treasury bonds in favor of other things. Inflation had been cooling but is still above target, and for the last few months the cooling had stopped.

It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine.

So... higher prices on stuff lead to a sell-off of bonds, raising interest rates. OK, I think I understand all that.

Right now? Short term t bill holders. They rollover so fast that interest rate hikes don’t affect the principle, since you just wait for them to expire then immediately grab the new higher interest rate.

Tether (issues usdt) is winning big right now because they mostly hold short term t bills.

> Tether (issues usdt) is winning big right now because they mostly hold short term t bills.

Well, they claim to. Since Tether is officially sitting on a giant money printer, their best strategy is to do absolutely nothing but count their money. So insofar as they're doing anything else it suggests they're lying.

In order to maximize cash flows, Tether has an incentive to grow the wider crypto ecosystem. Matt Levine wrote an excellent explanation in one of his recent “Money Matters” newsletters.

After the BUSD debacle, it’s clear that onshore and regulated reserves for stablecoins are a huge risk for defi dapps built on top of them. US policy regarding USDC and other such US regulated stablecoins are at risk of change at any time. Since well designed defi dapps are not upgradeable, future policy risks must be considered when choosing which stablecoin to utilize. USDT’s offshore and opaque balance sheet is proven safer for defi dapps than US regulated stablecoins. I wish this weren’t the case, but it’s proven in practice.

Hold to maturity investors change when inflation shifts so much.

Someone may have bought 10 year 2% notes intending to hold to maturity because they thought inflation would stay at 1% and they just wanted to park cash. But with inflation at 3-5% they now need to dump and buy something else.

People change their tactics to achieve their strategy.

2 years ago the 10-year Treasury was yielding 1.5%. Inflation would have to be below 1.5% for the following 10 years for the bondholder to make back more than inflation.

Actually people who bought Treasuries in 2021 are almost underwater on it already, just in inflation these last two years. Cumulative price increases for 2021 + 2022 was 14.5%, while 10 years of 1.5% interest gives you 16%. Inflation would have to be basically zero for the next 8 years for them to break even.

The parent poster is assuming that they have a rate of return that is acceptable at all times, rather than only at the time of purchase.

I highly doubt they are serious, but that's the interpretation I have if their POV.

Messing with the money supply hits it’s natural end? Leave interest rates low - inflation burns up asset prices. Run high? Asset prices fall as NPV values future cash flows less.

At some point we have to fix structural economic problems without the money printer.

How can we fix the problem without the money printer ?

There’s so much debt, individuals, corporations and governments are all deep in debt.

We can just pretend the debt does not exist (restructuring) but that’s pretty much the same as printing that amount of money, just done in a different way.

The only non-printer way is to get some sort of exponential productivity gain.

Maybe if we get the absolutely best case for AI that could give the productivity gains we need. Obviously assuming the benefits of AI are shared in an equitable way.

You could scoop up some bonds yielding 5-10% depending on your risk tolerance.

Could wait for stock market to drop (if it a happens) and grab some of your favorite companies for cheaper

>> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate.

I don't understand this part.

> >> The Treasury sells bonds with a fixed amount. People bid on them. The higher the bid, the lower the effective interest rate.

> I don’t understand this part.

With some simplified numbers: if the Treasury sells a bond that matures in 1 year and costs $100, and it is purchased at auction for $80, then it has an effective interest rate of 25%, because for each $1 the Treasury got selling the loan, it will pay $0.25 in interest in one year, as well as paying back the principal.

The treasury auctions T-Bills (bonds with 1 year or less to maturity) at a discount and that's how you get the "yield" so technically they don't pay interest.

For example, if you were to buy a 1 year today, you would purchase it for $94.84 and the Treasury would redeem it at maturity for $100. That's you receive the current yield of 5.43%.

Others have explained it, but I'll give it my go:

A bond has these intrinsic components:

-Face value: principal amount the coupon/interest is calculated on

-Maturity: Term/length of the bond

-coupon[0]/interest rate: periodic payment based on the face value, often once or twice a year.

If I own a bond, I can sell it like I would my car or a share of stock. If I have a face value $1000, 10 year, 10% coupon bond that has 6 years left, but I need cash now, I might sell it to you for less than its worth to close the deal faster. So if you buy it for $500, none of the intrinsic components change. You're still going to get 10% of $1000 annually. But on the $500 you spent, to you it's really ~20%. That's 'yield'. The lower the sale price the higher the yield.

FDIC insurance only goes up to 250k but if you're a big company, what do you do if you want to keep 10 million cash on hand as safely as possible? You buy US treasury bonds because they're the safest thing you can and every other big company is doing the same so there's always demand and you can trade them for cash extremely easily. Think of them like 'big boy dollars'.

Depending on the supply/demand any given day, the going price for a particular face value/maturity fluctuates, and so therefore the yield does as well. This is seen as a proxy to market sentiment and used as a benchmark for calculating other rates. In practice most people will just use the term 'interest rates' to refer to it, even though 'yield' is technically correct.

[0] bonds used to have literal paper tear-off coupons that you brought to the bank to get your payment.

Think about it this way. Example 1: A bond has no more coupon (interest) payments left and is going to pay out 100 at maturity[1]. The price where the bond is trading now is how much people are willing to pay now for that 100 in the future when the bond matures. So say the bond has a year to run from today and the price is 90. If the price goes down, the person purchasing that bond is paying less for that future 100. The "yield to maturity" has gone up. The same is true if the price goes up from here - the "yield to maturity" goes down.

OK now add in some interest payments. Say the bond has a year to go and pays 4 interest payments (one per quarter) with 100 at the end. The coupon payments are a fixed dollar amount that is specified at issue[2]. So say for ease of calculation it's going to pay 4 payments of 1 dollar, with the last one coming with the 100 dollars of principal paid back at the end.

It's easy to see that the previous relationship still applies - the price today is the value of all those cashflows discounted by some rate. If the price goes down, that means investors want a higher rate (because they are prepared to pay less for the future cashflows).

Hope that's clear.

Now when you add in other factors (eg risk and severity of default) it's easy to see that these are effectively a spread on the discount rate applied to these future cashflows. You're not really changing anything else just the cashflows are a bit more (or less) risky. So the central relationship - (price up = yield down and vice versa) still holds. These spreads are just another thing that might cause the price to go up or down.

Finally consider that you don't have to invest in this one bond, you could put your cash somewhere else instead. So if the yield available on similar instruments elsewhere in the market changes, the price of this instrument will adjust such that the yield works out about the same as other instruments that are believed to be about as risky. This makes sense just like if bank A starts offering a better rate on savings, people will start moving their savings there so bank B has to offer a better deal. In the same way, if interest rates in general go up, bond prices have to go down so that the yield to maturity they are offering to investors is competitive.[3]

[1] Or it could be a zero-coupon bond that pays no interest. I'm simplifying a bit by removing default, recovery, prepayment etc to make the central relationship clear.

[2] They aren't always fixed but I want to make sure you get the simplest case really solid in your mind because the complex cases don't change things too much actually.

[3] All other things being equal yadda yadda. Bonds are actually very complicated but this central relationship should at least be clear. One thing to note is different bond prices are more or less sensitive to changes in rates, which is why some of the key metrics (Duration, Convexity, DV01) track this sensitivity. One way in to thinking about this is the maturity of a bond. Say the bond is fixed rate with 100years to mature, that is going to respond to rate changes very differently to one with only 1 cashflow left expiring in 1 year because of the discounting I mentioned earlier.

> It doesn't help that the US government has had to sell a lot of its bonds lately, i.e. the debt is going up quickly. That too is tied to things like inflation, as well as the war in Ukraine.

Sure, in absolute terms the debt is going up quickly as it has for the past couple decades. But, in relative terms over that period, the current rate of increase is pretty average. Also, I’m honestly curious what you’re referring to with the specific inclusion of the Ukraine war. Its effect on the rate of increase in the US debt is virtually nothing.

It’s $75 Billion not $75 million.

The debt has grown so high now that 15% of all US government revenues go towards interest on the debt. Up from 7% when I was in college. How high does the debt have to grow before the country and government collapse?

Better to advise the World Bank and the IMF to loan them money if that’s not happening already..

The debt is money owed by the US to itself and foreign buyers of its bonds.

The debt is payable in US dollars. The US has control over how much supply of US dollars there is. The more US dollars, the "cheaper" they are in a foreign currency, but also the lower the value of a US bond in the hands of someone overseas.

So the current US national debt is held mostly by US people. $7T is currently held overseas.

So out of the ~$25T, $7T will be paid back in US dollars to overseas holders.

The rest is paid to US domestic holders. So that's 7/25 * 15 = 4.2% being paid outside of the US, the rest is effectively increasing the money supply inside the US.

The debt has to grow until people stop buying US treasuries when they are issued. Given that the majority of world trade is denominated in US dollars and that US Treasuries are effectively treated as the "risk free" base, and that the US debt is at ~122% of US GDP, that's just over a year's worth of US "income" to pay it back.

The US federal government share of the economy is ~24% (down from 30% at the height of COVID).

As a comparison, Japan's national debt is $9.2T (converted from yen) and is 263% of GDP. Its government share of the economy is ~21%.

> GDP is not “income”.

GDP is literally the primary national income measure.

Its not government revenue, but government revenue is largely a choice within parameters set by, more than anything else, national income.

No, GDP is Gross Domestic Product. It’s a measure of economic activity, not income. An analogy on a smaller scale: Visa’s GDP is the sum of all transactions that occur on its network. You wouldn’t call any of that income except the sliver siphoned off as interchange fees.

To make matters worse, GDP numbers are generally one of the most inaccurate and untrustworthy numbers since it’s set for political reasons. It’s not possible to measure all of the transactions that occur within a country since a large amount occurs offline and are unrecorded.

> > GDP is literally the primary national income measure.

> No, GDP is Gross Domestic Product.

Congratulations, you've expanded the initialism.

Now what are the group of economic measures including GDP, GNP, GNI, NNI, and a few others called as a group, because of what they all measure with slightly different inclusions and exclusions?

> The point might be that GDP is not the income of any individual entity, however construed.

Addressed upthread: “Its not government revenue, but government revenue is largely a choice within parameters set by, more than anything else, national income.”

That is, its is what sets the bounds on the revenue of the only relevant entity, within which the actual revenue is a matter of thr decisions of that same entity.

$75 billion is about 2% of the debt increase since the war began and most of that hasn’t come in a form that would have affected the debt number yet. Some of it can’t properly be said to affect the debt at all such as giving them military equipment for which we had already allocated funds to replace.

I won’t bother responding to anything beyond your first sentence since it doesn’t appear to be a response to anything I wrote.

> How high does the debt have to grow before the country and government collapse?

The absolute amount doesn't necessarily matter, because if you own the bonds then you're paying the debt to yourself. Other factors are a) who owns them b) what the interest rate is c) what currency they're in.

The usual problem for smaller countries is when they owe debt in foreign currencies.

Also note that long term interest rates would be very high if the market thought there was a hyperinflation risk, and they aren't.

The war spending itself is trivial, but the war has a bunch of knock-on effects on the global economy. Most directly, it raises fossil fuel prices, which affects everything else.

It's not the biggest part of inflation, but it's piled on top of things like post-COVID realignment and the very long low-inflation, low-interest-rate 2010s.

Banks, pension funds, municipalities, retirees. A lot of folks are sitting on very significant losses. The bond market is much larger than the stock market, and that means that this is very significant. There are other indicators that trouble is afoot. Credit default swaps spiking for regional banks. Big discordance between stock performance and bond performance. Prolonged and significant yield curve inversion.

Either bonds must go up or stocks must go down. Hard to predict which way this will resolve, but I don't see the Fed intervening unless the situation gets truly dire.

"It looks like you're using an ad blocker"

And it looks like you're spying on me. These sites need to stop pretending that there isn't a cost to their users.

Confidence?

The article is explicit that everyone thinks future bonds will have higher interest rates.

This isn't a "we don't think these will mature" this is "we think future bonds will have higher interest rates."