Paulson Urges ‘Break-the-Glass’ Plan for Treasury Demand Shock

Former Treasury Secretary Henry Paulson on Thursday urged U.S. officials to keep a short-term emergency ‘break-the-glass’ plan ready in case demand for U.S. Treasurys collapses. He warned the fallout would be ‘vicious’ and called for a targeted, short-lived option that can be deployed quickly.

The U.S. Treasury market serves as the benchmark for risk-free assets and underlies pricing for corporate bonds, mortgages and equities. Federal debt is roughly $39 trillion.

Economists describe a scenario in which investors demand higher yields to compensate for rising debt risk. Higher yields would increase the government’s interest bill and could widen budget shortfalls. The 10-year Treasury yield is about 4.3%. Some market participants say that if the Treasury cannot borrow at acceptable rates, the Federal Reserve could become a larger buyer of government securities.

A disruption in the Treasury market could affect other asset classes. A shift away from Treasurys might drive investors toward alternatives such as Bitcoin or gold if debt monetization raises inflation concerns and weakens confidence in the dollar. Major stablecoin issuers hold large amounts of short-term Treasurys and reverse repurchase agreements. One large issuer reports about 63% of its reserves in Treasury bills and roughly 10% in overnight reverse repos, representing more than $120 billion in Treasurys. That concentration could expose stablecoins to redemption pressure or fire-sale dynamics if confidence erodes.

A research lead at a cryptocurrency trading platform described the risk as a ‘watch-list macro tail risk.’ The analyst said a Treasury-market stress event could produce spiking yields, tighter global liquidity and risk-off selling that would hit Bitcoin and other tokens while amplifying stablecoin risks. The analyst added that over the longer term, investors might increase interest in non-sovereign stores of value.

Separately, the Treasury conducted its largest single debt buyback, accepting $15 billion of older securities maturing between 2026 and 2028. The buyback removed less-traded bonds from the market and returned cash to holders.

Paulson warned: ‘We need an emergency break-the-glass plan, which is targeted and short-term, on the shelf, so it’s ready to go when we hit the wall.’ He later said planners should prepare now, noting that the timing of any shock is uncertain but that its effects could be severe.