Former U.S. Treasury Secretary Henry Paulson has issued a stark warning that demand for U.S. Treasuries could face a 'vicious' collapse, urging regulators to prepare emergency backup plans. In a public statement, Paulson highlighted the growing fragility of the Treasury market, which he said has reached dangerous levels. A sudden drop in demand would trigger a cascade of consequences, severely impacting global financial stability.
Warning Signs: The Risk of a Demand Crash
Paulson pointed to the expanding U.S. fiscal deficit, recurring debt ceiling standoffs, and reduced buying from major foreign holders like China and Japan as key factors eroding confidence in Treasuries. He described a potential demand collapse as 'vicious,' involving plunging prices and soaring yields, which would raise government borrowing costs and potentially force the Federal Reserve to intervene with asset purchases. Paulson called on the Treasury and the Fed to 'immediately activate contingency plans,' including reinstating quantitative easing or coordinating repo agreements with major trading partners to prevent market instability.
Ripple Effects: Leverage and Crypto Market Stress
The warning comes amid related concerns from prominent investor Arjun Sethi, who flagged hidden leverage risks in the financial system that could amplify Treasury volatility. Meanwhile, S&P 500 short positions have reached an 11-year high, reflecting deep pessimism among institutional investors. The crypto market is also exposed: stablecoin issuer Tether holds approximately $141 billion in U.S. Treasuries, meaning any disruption in the Treasury market could destabilize its reserve assets and trigger de-pegging risks. Additionally, the recent $10.4 million loss at StablR due to a governance exploit highlights the vulnerability of decentralized finance systems amid macro turmoil.
Historical Context: Paulson's Precedent and Lessons
Paulson, who led the bank bailout during the 2008 financial crisis, views the current situation with deep concern. Unlike 2008, global debt is now much higher, central banks have less policy room, and crypto assets are more intertwined with traditional finance. A collapse in Treasury demand could simultaneously trigger a credit crunch and a digital asset sell-off, posing cross-market systemic risk. Paulson stressed that authorities cannot rely on 'self-correction' by markets, but must actively intervene to safeguard the safe-haven status of the dollar and Treasuries. He urged G7 nations to enhance coordination on emergency liquidity swaps and suggested the U.S. Treasury issue short-term bills to quickly absorb potential selling pressure.
As of press time, the U.S. Treasury has not formally responded to Paulson's remarks. However, market sentiment has already shifted: the 10-year Treasury yield edged higher following the warning, and the total crypto market capitalization fell about 2% intraday. Investors are closely watching upcoming Federal Reserve meetings for clearer intervention signals.