The Phased Demolition of the US Bond Market

The US Bond Market and the First Phase of its Demolition

The S&P 500 is at all-time highs while the US bond market struggles to find buyers at previous prices. This situation supports a long-standing thesis among independent analysts: the US bond market won't collapse overnight but will be demolished in phases. The fiat system, which broke in 2008, has not functioned without life support.

The starting point is a trickle: the percentage of US debt held by foreign entities continues to fall and, according to this analysis, could accelerate its decline with further sales. Global debt is around 300 trillion US dollars, with 60% denominated in dollars. US debt, in bonds, amounts to 35 trillion.

The Four Overlapping Fronts

The diagnosis is based on four coinciding problems. The 'death' of the yen, with a devalued currency and a central bank issuing more than it can sustain. Large banks with extreme balance sheets. Historic losses in fixed-income portfolios: when yields rise, previously issued bonds are worth less, and holders incur latent losses. And the fourth, which sums up the others: buyers of US debt are disengaging.

The underlying argument is uncomfortable. Central banks have been buying time for 17 years without correcting any of the underlying issues. In 2008, bailouts averted a collapse; today, the bubble is sustained by the very institutions meant to oversee it. If it bursts, it won't be just a few banks and insurers that fail.

Japan, the Reference Point We Glace At

Japanese 30- and 40-year bonds have plummeted, and yields have soared, putting the yen carry trade at risk. The interpretation here is that Japan is the beginning, not the exception: if its central bank holds more of its own bonds than it has issued, any interest rate hike becomes an arithmetic problem.

With the usual caution. Japanese collapse has been predicted for two decades, yet Japan persists, living better or worse than us depending on who you ask. The recurring answer is that the strange thing isn't that it collapses, but that it hasn't already. It sounds like bar talk until you look at the debt.

From 1.12 to 1.04: The Euro Loses Steam

The euro dropped from 1.12 to 1.04 dollars in two months. The official explanation is falling German exports, which have been in decline for three years. An alternative points to market flows after Trump's victory and, more fundamentally, to a persistent differential: cheap energy in the US, expensive in Europe, pushing companies to relocate where production is cheaper. With fiscally irresponsible governments involved, the narrative doesn't quite add up.

With energy priced in dollars, a cold winter becomes a direct inflation problem. Parity, they say, is just around the corner.

And Why Hasn't It Exploded Yet?

This is where the narrative breaks down. One side argues that all markets are intervened—bonds, stocks, metals, real estate—and that economic laws used for analysis do not operate freely. If they did, the collapse would have peine years ago. Another side adds that economics is a social science: for something to burst, a relevant collective needs to want it to burst, and today, no one has an interest in making the first move.

In the middle, a data point that confounds everyone: the S&P at all-time highs, the IBEX close to its historic peak, and wages buying what they bought two decades ago. Three incompatible assertions that are, however, true simultaneously. Nothing ever happens serves as a recurring joke, but also as the strongest endorsement for those who believe this will hold.

Tether, Bitcoin, and the New Debt Buyers

While the collapse is debated, some argue the buyer has changed. Tether, the issuer of the stablecoin USDT, with 151 billion dollars, became the seventh-largest buyer of US Treasury bonds in 2024, ahead of Canada, Taiwan, or Mexico. Bitcoin, meanwhile, hit $100,000.

Stablecoins financing the Treasury—indirectly and without interest, according to this view—is one of those news items that nobody knows how to categorize. A bubble for some, a crutch-supported algorithm for others.

Some will continue to wait for the exact date of the collapse. As is known with bubbles: while they rise, everyone believes they will get out in time. What if this time, the demolition isn't a collapse, but a gradual loss of the ability to buy the same amount with the same money?