Former Treasury Secretary Warns of Systemic Risk in US Bond Market

Former US Treasury Secretary Henry Paulson has called for the immediate development of a 'break-the-glass' emergency plan to mitigate a potential collapse in demand for US Treasury securities. Speaking in a recent interview, Paulson warned that the fallout from such an event would be 'vicious,' given the Treasury market's role as the foundation of the global financial system. The warning comes as US national debt exceeds $39 trillion. Economists have long cautioned against a 'doom loop' scenario where rising debt levels force investors to demand higher yields—currently at 4.3% for 10-year notes. This increase in borrowing costs further widens the federal deficit, potentially forcing the Federal Reserve to step in as the primary buyer of government debt to maintain stability. The potential for a Treasury crisis introduces significant tail risks for the digital asset ecosystem. While a loss of confidence in the US dollar could eventually drive investors toward Bitcoin as a non-sovereign store of value, the short-term impact would likely be severe. Market analysts warn of spiking yields and tighter global liquidity that could trigger aggressive risk-off selling across BTC and altcoins. The interconnectedness is further highlighted by stablecoin issuers like Tether, which reports that 63% of its reserves are held in US Treasury bills, with an additional 10% in overnight reverse repurchase agreements. Any instability in the underlying bond market could directly threaten the stability of these dollar-pegged assets. In a move to manage liquidity, the US Treasury recently executed its largest single debt buyback, accepting $15 billion in securities maturing between 2026 and 2028. This action aims to retire less-liquid bonds and provide cash to holders to maintain market functionality.