The fragile balance behind $30 trillion in US debt: a "ceasefire" that could break at any moment

The U.S. bond market is currently in a strange calm that is unsettling. On the surface, since this summer, U.S. Treasury yields have fallen, and market volatility indicators have dropped to four-year lows, suggesting investors have calmed their nerves. But behind this seemingly stable facade, a silent game is ongoing—the struggle of will between the Trump administration and tens of trillions of dollars in asset managers over the circulation of $30 trillion in government bonds.

Awakening and Compromise of the “Bond Vigilantes”

To understand the current situation, we must go back to the crisis in April of this year. When the Trump administration announced tariffs on dozens of countries, market fears were fully ignited. U.S. Treasury yields experienced the largest weekly increase since 2001, and the dollar and U.S. stocks were sold off simultaneously. This was not ordinary market volatility but a “punishment” by bond investors for mismanagement of government finances.

Wall Street insiders refer to these investors as “bond vigilantes”—they push up yields by selling large amounts of government bonds to pressure the government. This force cannot be ignored. Under pressure, the Trump administration had to compromise: delaying the implementation of tariffs, and the final agreed-upon tax rates were much lower than initially proposed. The market thus learned a lesson: the bond market has the power to constrain the government.

Daniel McCormack, Head of Research at Macquarie Asset Management, once said, “The deterrent effect of the bond market on governments and politicians is unmatched by any other market.” American investors have felt this acutely this year.

The Government’s “Stability” Tactics

The bond market and the government have not truly returned to calm. On November 5, the U.S. Treasury signaled it was considering issuing more long-term bonds, coinciding with the Supreme Court hearing arguments on the legality of Trump’s broad trade tariffs. As soon as the news broke, the yield on the 10-year benchmark Treasury surged over 6 basis points, the largest increase in months. Concerns about the U.S. $30 trillion debt repayment capacity arose.

To soothe the market, the Trump administration quickly launched a series of carefully designed measures. U.S. Treasury Secretary Steven Mnuchin repeatedly stated publicly that his core responsibility is to “be the chief underwriter of U.S. debt,” and he openly said that Treasury yields are a barometer of his success or failure. Implicitly, this means the government is determined to suppress yields.

Specific actions by the Treasury include:

First, expanding the repurchase (repo) program for government bonds. On July 30, the Treasury announced an expansion of its repo operations targeting long-term bonds, focusing on 10-year, 20-year, and 30-year maturities. Officially, this is to “improve market liquidity,” but market participants are well aware—this is a de facto policy to suppress long-term bond yields.

Second, changing the financing structure. The Treasury relies more on issuing short-term Treasury bills rather than long-term bonds to finance itself, avoiding excessive supply of long-term debt that could push yields higher. Analysts estimate that even if the fiscal deficit remains roughly the same as in 2025, the supply of Treasury securities with maturities over one year issued to private markets will decrease year-over-year.

Additionally, the Treasury discreetly consults investors on major decisions. An informed source described this as “proactive outreach and early communication.” For example, the Treasury sought feedback from bond investors on the five nominees for Federal Reserve Chair. When investors indicated that nominating Kevin Hasset would trigger negative reactions, the Treasury adjusted its considerations accordingly.

The Unexpected Ally of Stablecoins

The Trump administration’s openness to cryptocurrencies has also created an unexpected new demand for the U.S. bond market. Stablecoin issuers have become incremental buyers of U.S. debt. Bissett predicts that the current stablecoin market, valued at about $300 billion, could grow tenfold by the end of this decade, significantly boosting demand for short-term Treasury bills.

This may be a major unexpected gain for the Trump administration in stabilizing the U.S. debt market—emerging crypto assets are instead becoming a force to support the bond market.

Fragile Balance with Heavy Concerns

Interviews with more than a dozen bank and asset management executives by Reuters indicate that the U.S. bond market appears calm on the surface but is turbulent beneath. The indicator measuring the extra yield investors demand for holding 10-year U.S. bonds—the term premium—has recently risen again. This suggests that market unease has not fully dissipated.

Rate strategist Megan Swiber pointed out that the current stability of the U.S. bond market is only built on two fragile pillars: one, moderate inflation expectations; two, the Treasury’s reliance on short-term debt issuance to ease supply pressures. If inflation surges or the Federal Reserve shifts to a hawkish stance and raises interest rates, these conditions could collapse.

The U.S. annual fiscal deficit remains around 6% of GDP, a level that makes investors generally uneasy. High debt financing needs keep the peace in the bond market but also hide risks.

Even more concerning is the reliance on short-term Treasury bills to fill the fiscal gap, which itself harbors hidden dangers. If interest rates suddenly spike, the government will have to refinance this short-term debt at very high costs. Federal Reserve Governor Stephen M. Mian has criticized this model, noting that it will burden the government with a large amount of short-term debt.

The Possibility of Another Collapse

Multiple risks could shatter the current balance. Rising prices due to tariffs, bursting of market bubbles driven by artificial intelligence, or the Federal Reserve’s excessive easing measures to boost the economy—these factors could reignite bond market risks.

The market reaction in April already sounded an alarm for the Trump administration. Stephen Douglas, Chief Economist at the National Investment System Consulting, pointed out that when the dollar depreciates and U.S. bond yields soar, the market response is characteristic of “emerging market crises.” This is enough to demonstrate that when the bond market spirals out of control, its constraints on government policy are decisive.

Cynide Colton Grant, Chief Investment Officer of Wealth Management, put it plainly: “Bond vigilantes have never disappeared; they’ve just been dormant or active, depending on the circumstances.”

Currently, the Trump administration has temporarily suppressed these “vigilantes,” but this suppression is only a temporary measure. When real financial risks emerge, no one can guarantee that the bond market will remain silent again. The “ceasefire” between the $30 trillion in U.S. debt and this government is hanging on a precipice.