Debt by any other name is still debt, and if you’ve ever been in any amount of it, you’ll know that the one thing that is definitely not the solution is, well, even more debt. And yet, that seems to be the preferred strategy of modern governments: If more money is needed, then they can simply fund it with endless debt.
The level of arrears accrued by the powers of the world is almost incomprehensible at this point. According to the Institute of International Finance, total global debt, across sectors and types of lending, is over $350 trillion, equivalent to about 305% of global GDP. That’s compared to 240% of GDP in 2005.
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Our comfort with using borrowed money is why, perhaps, U.S. Treasury Secretary Scott Bessent is so confident in his latest scheme to curb concerns over waning demand for bonds — buying back more of the debt to simply reissue it under different terms.
The plan, outlined late last week, is intended to improve market conditions by soaking up longer-term bonds with high yield rates as people become increasingly wary of how the investment vehicles will perform in these economically uncertain times.
The problem with the buyback is the fact that the Treasury will issue shorter-term bonds to pay for it, which, according to JPMorgan’s James Sullivan, is akin to “paying your mortgage with your credit card” as it “can work for a while, but eventually the mismatch starts to become more obvious.”
Sullivan, who serves as the firm’s co-head of global fundamental research, made the comparison on CNBC’s “Squawk Box” on Aug. 21, warning that the Treasury is only deferring the problem of the glaring debt to a later date. Though the department is unfortunately quite limited in how it can deal with the situation in any meaningful capacity, experts remain critical of the temporary fix.
Instant effects — but what about long-term?
The announcement had the effect of immediately pushing 30-year treasury yields — which had reached a ceiling of 5.34% last week, the highest seen in 19 years — to 5.18%, though they have since risen back to close to 5.25%.
Some argue that the unexpected timing of the action was the action, including Padhraic Garvey, ING bank’s Head of American Research, who admits that though the recovery will merely “dampen but not abort the pressure.”
“By stepping in here with the bigger buyback intention, the US Treasury could, in part, be signalling to the marketplace that it is watching and monitoring and prepared to take action,” Garvey wrote in an analysis on Aug. 19.
“This could have been done two weeks ago as a part of the regular quarterly announcement. The fact that it’s being done now suggests an ulterior motive — to calm nerves with long yields under meaningful upward pressure.”
But to some, the move looks less like taking control and more like panic shooting from the hip.
The escalating level of national debt, now at $40 trillion, will no doubt continue to inspire unease, along with inflation and the excessive leverage being used to cover rampant AI spending. Together, it all points to downward pressure on bond prices, which is what prompted recent sell-offs not just in the US, but worldwide, of what has long been considered one of the safest asset classes.
Read More: Vanguard reveals what’s coming for U.S. stocks — and it could be bad news for this group of investors
The technicalities and implications for the consumer
The Treasury has stated that it “is increasing, by at least double, the size of liquidity support buyback operations” for 10 to 30-year bonds, to the tune of $4+ billion, from Sept. 9 and Nov.4, 2026. Details of future buybacks will be announced Nov. 4.
Bringing down bond yields in this way, though far from a permanent fix, should keep other borrowing rates — which these yields set a precedent for — from ballooning more and straining the overextended public even further.
But that doesn’t change the fact that costs of living are already elevated; it just (hopefully) prevents them from getting far worse.
In the current securities environment, the Treasury is blowing $3 billion per day on high interest payments to bond holders, all while those holders face the prospect of losing money when the bond matures or they try to sell it on the secondary marketplace, leading to less demand for these bonds in the first place (and thus less money for the government).
Such astronomical and growing federal debt, if not adequately addressed, will inevitably deteriorate citizens’ quality of life in the form of greater daily costs, borrowing costs, taxes and more, especially if GDP is not expanding to even try and keep pace.
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This article originally appeared on Moneywise.com under the title: JPMorgan compares Bessent’s $4B bond buyback to ‘paying your mortgage with your credit card’ as U.S. debt hits $40T
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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