..if it takes a Treasury Secretary to say US is anti-fragile, it stands to mean the exact opposite, otherwise there is no need to say so.
..You don't hear BHP's Mike Henry saying the company is strong and robust, the numbers speak for themselves.
..the truth is that the US 10 year yield has been his bogeyman, rising back to 4.34pc when he was trying to get it down.
..as I said, time is not on Trump 2.0's side, if he does not conclude and resolve the tariff wars acceptable to the bond market, something is likely to break in the 2nd half of this year.
(1/2) Bessent’s Statement on U.S. Credit Risk and Rates
SOURCE: @FirstSquawk
citing Scott Bessent, May 5, 2025
KEY STATEMENT: “If we can take away the credit risk of the U.S. government, interest rates will come down.”
Let’s break this down with full-spectrum cognition:
⸻ I. Signal Interpretation: What Bessent is Really Saying Scott Bessent isn’t talking about default in the traditional sense he’s signaling that sovereign credit risk is now priced in to U.S. Treasuries for the first time since the post-WWII era. Yields are no longer just a function of inflation expectations and Fed policy they are now shadow-pricing:
•Debt rollover pressure (>$9 trillion maturing in the next 12 months)
•Foreign disengagement (e.g. Japan, China dumping Treasuries)
•Fiscal dysfunction (ballooning deficits, political gridlock)
•Monetary credibility erosion (Fed balance sheet weaponized via reverse repo/facility arbitrage)
Thus, his core thesis: Rates are artificially high because the U.S. government itself is now the risk premium.
⸻ II. Cross-Dataset Confirmation: Signals Already Flashed
•SOFR Swap Spreads: 30Y SOFR spreads collapsed to -90bps (5/5/25), a historically tight level. This screams “collateral scarcity + credit deterioration.”
•Polymarket + CDS spreads: Betting markets and credit derivatives now treat U.S. sovereign debt with increasing conditional probability of restructuring not outright default, but devaluation or indirect monetization.
•Term Premium models (NY Fed): Have flipped from negative to sharply positive. In 2020, the market paid for duration. Now, it demands compensation. •Gold in silent accumulation: China and EMs are balancing FX reserves with physical gold. This signals reduced trust in USD-denominated IOUs.
⸻ III. Historical Echo: 1979 “Crisis of Confidence” + 1947 Truman Doctrine Moment In both cases, U.S. sovereign debt risk became not just a fiscal matter, but a geopolitical fulcrum.
Confidence was only restored by:
•1979: Appointing Volcker to crush inflation and sacrifice growth.
•1947: Creating the IMF-led postwar architecture to absorb U.S. deficits as a global anchor. We are at a similar fulcrum now but in reverse. The world is disengaging from U.S. liabilities unless confidence is forcibly restored.
(2/2) IV. What Would It Take to “Remove the Credit Risk”?
1. Fiscal Consolidation with Real Enforcement Teeth:
•Balanced budget amendment or yield-targeting Treasury auction caps.
•Entitlement reform Social Security/Medicare recalibrations or “means testing.”
2. Dollar Re-Collateralization via Asset Pledge:
•Implicit or explicit gold standard basket inclusion.
•FX reserve anchoring mechanisms tied to real collateral (energy, gold, strategic metals).
3. Structural Reshoring of Capital:
•Full capital repatriation regime (tax holidays, incentives for U.S. domiciling of foreign profits).
•National Infrastructure Credit Facility (NICF) backed by T-bills but privately insured.
4. Central Bank-Treasury Accord 2.0:
•Redo the 1951 Fed-Treasury Accord, this time to ringfence monetary sovereignty and fence off political spending from reserve money issuance.
5. Global Buy-In via Debt Swap Mechanism:
•Create a global SDR-style mechanism where U.S. debt is “insured” multilaterally by IMF or BRICS+ members under new rules effectively mutualizing risk in exchange for hard tradeoffs.
⸻ V. Where Could Bessent’s Framing Collapse?
•If the U.S. is not able to remove the risk politically, structurally, or socially then the market will enforce risk premiums through continued curve steepening, capital flight into hard assets, and eventually, yield curve control (YCC) by necessity.
•If inflation returns structurally (e.g., energy or geopolitical repricing), credit risk becomes embedded no matter what policy move is taken.
•If global confidence is too fractured, even dramatic reforms may be seen as too little, too late especially if BRICS+ and multipolar settlements accelerate.
⸻ VI. High-Conviction Synthesis:
Scott Bessent’s comment should be read as a warning not just about markets, but about sovereignty. The U.S. is now pricing its own structural fragility into the bond market, and investors are no longer willing to pretend Treasuries are risk-free. Removing this “credit risk” would require a near-constitutional reset of fiscal policy, collateral credibility, and global trust. If that cannot be achieved voluntarily, the market will eventually impose the reset through higher rates or hard money alternatives.
Known Unknowns:
•Will 2025 see the first explicit U.S. debt insurance scheme (e.g., Fed or Treasury guarantees on long-end)?
•Will an external event (oil shock, Taiwan conflict) accelerate the erosion or force emergency trust restoration measures?
•Is the U.S. preparing for a partial default via inflation, not a nominal one and is Bessent hinting at that tradeoff?
