In 1789, as the fledgling United States struggled to find its financial footing, Alexander Hamilton, the first Secretary of the Treasury, made a bold declaration: “A national debt, if it is not excessive, will be to us a national blessing.” Hamilton’s vision was clear—debt, when managed wisely, could be a tool to build a nation. But what happens when that debt grows unchecked, and the buyers who once eagerly financed it begin to step back?
Fast forward to today, and the U.S. finds itself at a crossroads Hamilton could scarcely have imagined. The world’s deepest and most liquid bond market is showing cracks, and the tremors are being felt far and wide. In just a few days, yields on U.S. 10-year Treasuries surged by 60 basis points—a move that would typically signal a crisis, a war, or a central bank shock. But this time, there was no fire alarm, no panic headline. Just a sharp repricing of risk.
The question is: Why now? And what does it mean for the future?
A Yield Spike Without the Usual Suspects
The recent surge in Treasury yields has left many scratching their heads. There was no major selling from China, no sudden flood of new debt issuance from the U.S. Treasury. Yet, the market buckled. Why?
Because markets are forward-looking, and they see what’s coming.
The debt ceiling, which had acted as a temporary brake on Treasury issuance, has been lifted. In Q1 2025, the U.S. borrowed just $2 billion from the public—a stark contrast to the $262 billion issued in October. This wasn’t fiscal prudence; it was a legal constraint. Now, with that constraint gone, a tidal wave of new debt is about to hit the market.
Variant Perception, a leading macro research firm, notes that the bond market panic we’re witnessing is a trading opportunity—but it also underscores the fragility of the system. As they put it, “stabilizing the U.S. bond market is now priority number one for the government.” The question is whether policymakers can act quickly enough to prevent a deeper crisis.
The Return of Tariffs and Inflation Risk
The spark for the latest move in yields was the market’s repricing of inflation and geopolitical risk following renewed tariff threats. But this isn’t just about trade. It’s about supply chain shocks, rising input costs, and a weakening dollar outlook. Tariffs create stagflationary pressure—slowing growth while raising prices. And just as those fears return, the Treasury is preparing to flood the market with hundreds of billions in new issuance.
Right now there are clear parallels between the current situation and the sudden-stop shocks of the COVID-19 lockdowns. The haphazard implementation of large tariffs, all at once, is creating a policy-induced recession. Business hiring, capital expenditures, and expansion plans are all on hold, waiting for clarity that may not come soon.
The Silent Shift in Global Demand
For years, foreign buyers like China and Japan have been the bedrock of the U.S. Treasury market. But that foundation is eroding.
China, once a net buyer of U.S. debt, has shifted to a neutral-to-outflow position. As Variant Perception points out, “China doesn’t need to sell for it to be a problem. If they’re not buying, the stabilizing bid is already gone.” Rising U.S. yields and a weakening dollar only accelerate this trend, as the incentive to support U.S. debt markets diminishes.
Japan, the largest foreign holder of U.S. Treasuries, is also at a turning point. For years, Japanese institutions have supported the market through the yen carry trade—borrowing cheaply in yen to buy higher-yielding U.S. assets. But cracks are forming in that strategy. A weaker dollar eats into yen-denominated returns, rising U.S. yields increase volatility, and a potential policy shift at the Bank of Japan could reduce the incentive to look abroad. If Japan even modestly reduces its Treasury appetite, it could deepen the demand vacuum at the worst possible time.
Rumors, Panic, and the Fragility of the System
Behind the scenes, the sense of unease is palpable. Variant Perception highlights a swirl of rumors that underscore just how fragile the system has become. Last week, whispers spread among market participants that Scott Bessent, a key White House advisor, had threatened to resign over concerns about the bond market’s stability. Meanwhile, there were reports that the Bank of Japan was pressured into bidding for U.S. Treasuries to ensure recent auctions didn’t falter.
These rumors, while unconfirmed, paint a picture of policymakers scrambling to prevent a deeper crisis. As Variant Perception notes, “The old market adage that markets stop panicking when policymakers start panicking rang true last week.” The Fed, too, felt compelled to reaffirm its financial stability backstop, signaling that it is acutely aware of the risks.
This dynamic—where policymakers are forced to act to calm markets—echoes Mario Draghi’s famous “whatever it takes” moment during the Eurozone crisis. But the question remains: How long can these interventions hold back the tide?
Liquidity Looks Fine—Until It Doesn’t
At first glance, financial conditions appear calm. Reverse repo usage is down, money market funds have shifted away from the Fed, and bank reserves are stable. But this calm is an illusion, created by suppressed Treasury issuance. Once the debt flood begins, it will soak up liquidity just as the global buyer base is thinning out.
The Federal Reserve, which acted as a buyer of last resort during previous periods of heavy issuance, is no longer in the game. With Quantitative Tightening in full swing, the Fed is allowing Treasuries to roll off its balance sheet, stepping back from primary market support. Unless a crisis forces a reversal, the Fed won’t be the buffer this time.
The Real Danger: A Silent Tipping Point
The most concerning aspect of this situation is that it doesn’t require a panic to spiral out of control. Markets don’t need to collapse in a day. All it takes is a few fewer bids from Japan, a passive quarter from China, or a weak auction here and there. Suddenly, the market buckles—not because of known selling, but because there are no willing buyers at the margin. Stabilizing the bond market will become the government’s top priority. But if the mix of higher yields, a weaker dollar, and lower equity values are left unchecked then we may well see rising convern about an imminent sovereign debt crisis.
Conclusion: The Tremor Before the Quake
Alexander Hamilton once saw debt as a tool to build a nation. But today, the U.S. faces a very different reality. The recent 60 bps spike in Treasury yields is a warning sign—a tremor before the quake. If this is what happens when the system is still “stable,” what will it look like when the real pressure arrives?
The tsunami isn’t coming. It has already begun.
