The US Bond Market Crisis and the Economic Crisis of Imperialism

A new debt crisis has struck the capitalist world, marked by mass sell-offs of US bonds and a desperate attempt by the US Treasury Department to stave off the weakening financial position of US imperialism.

Over the past few weeks, the sell-off of US government bonds has intensified, pushing the yield on 30-year Treasury securities to roughly 5.5% on September 24, the highest level since 2007. The bond crisis has exposed how far Washington will go to safeguard the profits of finance capital and foist its losses onto working people.

What is the purpose of bonds? They are legal promissory notes issued by the government for borrowed money; a financial claim on future government revenue. What are yields? A bond’s yield is the annualized return an investor can expect at its current market price if the security is held to maturity. Unlike the bond’s fixed coupon rate, its yield changes as its market price changes. US Treasury bonds pay their fixed coupon interest every six months and return their face value at maturity.

When investors have less confidence in the value of the financial instrument they are buying (bonds), speculators demand a larger share of future state revenue (yields), selling off and moving their investments elsewhere unless yields adjust. Unlike many other forms of debt, the coupon rate on a conventional Treasury bond is fixed when it is issued, while its market price and yield fluctuate afterward. Financial markets generally treat US Treasury securities as among the safest dollar-denominated assets because they are obligations of the US government.

Why would a lower bond price but a higher yield be bad? If you are a speculator who bought $1,000 in US bonds 10 years ago expecting to receive $1,050 when you finally cash out (a 5% rate of profit), you may be less likely to want to hold on to your bond if you anticipate inflation will continue to go up and the Federal Reserve will increase interest rates. For example, an investor who holds a Treasury bond paying a fixed 5% nominal return may receive more money at maturity than they originally invested. However, if inflation averages 10% over the same period, that money will have less purchasing power despite nominal growth. Inflation can erode the real return on fixed-rate government debt even when the nominal return remains positive. When the state must focus on repaying higher interest, it has less fiscal capacity to fund the military, state-owned enterprises, and other large budget items.

Major banks use the yield at which bonds are set as a benchmark for their own loans, including those for monopolists who want to open factories or warehouses or invest in new machinery and those for workers who need a new home or car. This would raise interest rates for homeowners and car buyers, compounding the ongoing affordability crisis American workers face.

The US, emerging from World War II as the sole hegemonic imperialist superpower, constructed the world monetary system with the dollar as its mainstay. The selling of bonds denominated in dollars created a financial reservoir to pay for never-ending imperialist wars and interventions, the stationing of troops abroad in every continent, bailouts for monopolies facing bankruptcy, and bribes to pay for temporary peace when rebellion struck among the working masses.

While nearly 90% of international foreign currency exchange transactions are conducted in dollars, the value of the dollar and of bonds has been increasingly challenged. With the trade deficit ballooning to $88.6 billion as of July, heavy military expenditures to fund the war of aggression on Iran and elsewhere, tax cuts for the monopoly capitalist class, and bailouts for the major banks and other corporations in 2008-2009 and 2020-2021, the size of government debt has exploded to its highest level ever at $40 trillion.

The Treasury Department’s increasingly direct intervention in the bond market reveals how, as the debt burden expands and the state continues to finance military expenditures and other obligations, it becomes increasingly dependent upon managing the bond market itself to maintain access to affordable credit. The state is therefore compelled to intervene in the financial system to manage the contradictions that its own fiscal and military commitments have produced.

Treasury Secretary Scott Bessent has responded to the bond crisis by expanding the Treasury Department’s program of buying back outstanding government bonds. In one September operation, the Treasury purchased approximately $5.2 billion in securities maturing in 10 to 20 years, while separately expanding its buyback operations for longer-dated securities. These purchases create additional demand for Treasury securities. They are intended to provide liquidity to the bond market while also allowing the government to manage the composition of its outstanding debt.

In other words, the Treasury is simultaneously issuing new debt while purchasing existing debt, effectively using new borrowing to manage the value and liquidity of previously issued government securities. The state is therefore intervening directly in the market for its own debt at a moment when investors are demanding higher yields to hold it.

The US government bond’s yield rates are embedded throughout the international capitalist credit system, influencing fictitious capital—financial claims on future income such as bonds, stocks, and other forms of credit, which are distinct from capital directly engaged in producing commodities—in areas including corporate loans, mortgages, and other forms of credit. As a result, rising Treasury yields will raise borrowing costs across the board, exposing the contradictions between an expanding mass of financial claims and the productive economy that must ultimately generate the value to sustain them.

The Treasury does not have the Federal Reserve’s ability to conduct monetary policy by creating central bank reserves and adjusting short-term interest rates. As the central institution responsible for US monetary policy, the Federal Reserve has a mandate to promote maximum employment and stable prices, giving it substantially greater power to respond to financial and economic crises by adjusting interest rates and other monetary tools.

The Federal Reserve and its new chair, Kevin Warsh, face their own dilemma amid persistent inflation, even as higher Treasury yields are already raising mortgage and corporate borrowing costs. If the Federal Reserve sets lower rates, it could ease the debt burden of monopolies and some working people trapped in predatory housing and car loans. However, easier monetary conditions could also increase inflationary pressure and weaken the dollar, raising the cost of living. If the Federal Reserve raises rates, it could put downward pressure on inflation, but at the cost of higher debt-servicing burdens and potentially “disciplining” the economy by bankrupting businesses and workers who can’t afford their loans, reducing economic activity and increasing unemployment.

Image: The US Treasury Department Building. Credit: Sealy j on Wikimedia Commons (CC BY-SA 4.0).

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