Lyn Alden & Luke Gromen: Who Will Keep Buying U.S. Treasuries?

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Lyn Alden & Luke Gromen: Who Will Keep Buying U.S. Treasuries?

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Summary

Lyn Alden and Luke Gromen argue that the global bond market is undergoing an orderly but consequential deterioration as foreign Treasury demand weakens, domestic buyers become constrained, Japan gains incentives to repatriate capital, and US fiscal dominance increasingly limits what monetary policy can accomplish. Gromen argues Kevin Warsh effectively cannot meaningfully raise rates because US “true interest expense”—gross interest plus entitlements and Veterans Affairs—already equals roughly 105% of federal receipts and is growing much faster than revenues, while Alden says whether rates move 25 basis points matters far less than persistent deficits around 7% of GDP, energy costs, and fiscal credibility. Their larger concern is that once managers of trillion-dollar portfolios collectively recognize the fiscal trajectory as unsustainable, capital could rush toward scarce assets such as gold and Bitcoin so rapidly that authorities may restrict market activity and effectively reprice the financial system.

Top 5 Key Topics

• Treasury buyers are getting squeezed: Alden says foreigners are not buying enough of the expanding Treasury supply, while pensions and insurers have finite balance sheets, banks need regulatory flexibility to absorb substantially more, and a balance-sheet-hawk Fed does not want unlimited quantitative easing. She describes the result so far as an “orderly degradation” of global bonds rather than an acute liquidity crisis.
• Japan’s potential capital repatriation: Because Japan is a major creditor nation with enormous foreign holdings, Alden says it has a “nuclear option” of bringing capital home if the yen or Japanese government bond market becomes disorderly. Gromen notes foreigners hold roughly $65 trillion gross and $22–23 trillion net in dollar assets, making Japanese selling of US assets and purchases of yen assets potentially significant.
• Why Warsh may not hike rates: Gromen argues Kevin Warsh is not truly a hawk and points to his December 2018 “Fed Tightening, Not Now” op-ed with Stanley Druckenmiller. More importantly, he calculates US gross interest, entitlements, and Veterans Affairs at 105% of receipts through fiscal Q3 2026, with those obligations growing roughly 7%–12% while receipts grow about 4%, making further hikes potentially self-defeating.
• Fiscal dominance overwhelms monetary policy: Alden argues today’s environment differs fundamentally from the Volcker era because US public debt exceeds 100% of GDP and inflation is driven more heavily by fiscal spending than bank-credit expansion. She therefore considers a 25- or 50-basis-point Fed move relatively unimportant compared with approximately 7%-of-GDP deficits, Iran, oil, and record crack spreads that have made gasoline and especially diesel behave as though crude itself were above $100 per barrel.
• Risk of a disorderly hard-asset repricing: Gromen believes investors may underestimate how little time they could have once large institutions internalize the fiscal problem, arguing that trillion-dollar portfolios cannot all rotate smoothly into gold and Bitcoin simultaneously. He speculates authorities could temporarily freeze markets and reopen them after a dramatic repricing, comparing the potential wealth effect with Ukrainian accounts of 1990s currency collapse and arguing holders of scarce hard assets could fare far better than holders of nominal debt.