There are so many plumbing issues with the financial system happening at once that people really do not have a clear picture of what is happening in totality.
Start with Japan... Still the largest foreign creditor. However they are facing a situation where the yen carry trade that began after the plaza accords in the 1980s is unwinding. The recent Treasury intervention and the associated expansion of the repo market so they do not sell treasuries directly reveals a hidden structural weakness. This leads to the AI boom because cheap Japanese debt was recycled into larger yields in the U.S. And it's different this time because companies like Microsoft have what is rated as safer debt than the US Treasury itself. The yield on financing part of the AI boom has been much better than yields back home in Japan. So even Japanese institutional investors may start seeing domestic debt as more attractive as the carry trade unwinds and domestic Japanese debt starts paying more. This ties back into the recent treasury intervention and offering a way to unload U.S. debt without impacting the markets directly.
Which brings us to an ongoing structural change that will remove the largest foreign investor in U.S. debt. Which as we all know, is approaching $40 trillion with over $30 trillion of that being held as public debt. Meanwhile, the budget deficit is continuing to rise causing even more issuance of debt. After the 2008 crash, and over the next decade, the U.S. was able to issue debt basically for free and it issued a ton of it. But that debt matures and when it matures, it has to largely be reissued at current rates. There was no free lunch. With the Japanese largely pulling back and at best not selling the debt they have now to defend their currency or to chase domestic yields in Japan, that goes to the UK as the second largest foreign investor. And the UK clearly can't absorb what the US has to issue and refinance. China has been reducing its holdings because as the BRICS bank, etc, replace their need for dollars, they will begin using it in more creative ways.
Some speculation is that the U.S. intervention into the yen carry trade is being challenged by foreign actors, which did not happen during past interventions. Monitoring the daily spread, and if the yen continues climbing over 160 then this will be the first time the U.S. intervention failed to work. To prevent selling existing Treasuries to defend the currency, the Japanese investors will unload it in the repo market.
But this brings us to a new structural problem in response to the insane amount of debt being issued and refinanced and this is called the weighted average maturity. Recently, the U.S. Treasury implied that they are going to begin moving more issuance to shorter term debt because those markets are currently still much more liquid than the longer term markets that had issues revealed by the failure of Silicon Valley Bank. When SVB needed to cover deposits, they found the 20 and 30 year Treasury market was not as liquid as they had hoped. This same fact likely pushed the Treasury to have Japanese investors move towards the repo market instead.
But this brings a new problem, because there is only so much appetite for increasingly taking long term debt and reissuance and moving it towards the front of the weighted average. Currently around 6 years, and the goal is to move it between 2 and 4. Imagine the liquidity impact on moving large amounts of new debt issued and refinanced debt from the 30yr to more short term funding.
Next up, there is a need to have the Federal Reserve unwind its balance sheet even more quickly at the same time all of the above is happening. But it is the Feds balance sheet and forms of QE that have propped up the repo market itself under times of stress. So after Japan, the UK and China all have reasons to continue cutting back, and after the short term funding gets eaten up, the yields will have to rise dramatically to continue attracting investors for even the short term. The immediate response to this will first be to stop issuing the 20 year and reduce the 30 year. They may debate the 50 year but odds are if the 30 has a weak showing that there would be even less appetite for the 50.
But with the unwinding yen carry trade, we have to consider the impact on funding the AI boom going forward. Clearly this has been on the mind of nVidia recently, with the move to create a form of mortgage backed securities for GPU capacity. The largest tech companies have something like $2-3 trillion in shell companies set up specifically for the data center buildouts. The rest of the revenue seems to be going in a circular motion among several large companies. They know as soon as they stop funding the AI buildout, or are forced to by the unwinding of market forces, that the party will end. This is the very reason for the move from nVidia recently. And if mortgage backed securities don't make you feel better about it, they have also compared it to how airlines trade airplanes as assets. Neither is a comparison that they should want to make for historical reasons.
Now in the past, the U.S. allies would see the value in the financial alliance and would ride to the rescue of something like a 50 year bond to lock up these bubbles for a long time. After so many years of tariffs and other forms of coercion, even the recent yen internvention broke norms between the U.S. Treasury and the European Central Bank. Maybe in the past the Saudis, UAE, etc would have jumped in to invest, but clearly those days are over too... With massive implications for the petrodollar. Which itself is another major factor in the reserve currency system and is clearly under strain from the Iran War and other geopolitical factors.
The U.S. response to a debt crisis won't be to default, it will do what it always has done, and try to inflate itself out of the situation. It's just that they can't really take this path either. The more the Federal Reserve becomes the lender of last resort and expands its balance sheet to backstop moving all this to the short term repo market, the end result will be extreme inflation. The yields will begin rising on short term debt faster than we have been seeing on long term debt. Before long, it will be early 1980s style interest rates, and if they don't find a solution, this process will be self repeating... The $40 trillion, with roughly $1.2 trillion in deficits every year, and past reissuance, all into short term funding markets, where the only buyer capable of absorbing it all is the Federal Reserve, there is just no real way out of it.
Even all the structural problems with mortgage backed securities haven't been fixed since 2008. If the AI bubble pops, the energy prices keep increasing, the yen carry trade continues to unwind, any South East Asian conflict with North and South Korea, China/Japan/Taiwan, etc... Or with the Ukraine war ending poorly with Russia moving further into the baltic states...
Maybe hope that a guy who bankrupted several casinos can figure out to do when the largest casino in history runs out of money? I don't know.
EDIT: Sorry for the wall of text. Had a lot to say.