The U.S. Treasury Market Has Lost Its Damn Mind

The deeper we look, the worse it gets...

Dear Fellow Traveler.

We live in an economic fever dream.

Do you know that feeling when you're watching a disaster movie and screaming at the screen because the characters are making terrible decisions?

That's me, but with the U.S. Treasury market.

The Federal Reserve is sitting on a $6.7 trillion balance sheet. That figure is larger than most countries' GDP. But that balance sheet will go up over time… not down.

In the last week, they bought another $60 billion in bonds.

But get this. They're still claiming they're doing "quantitative tightening." It’s not QE they say beacuse they’re just rebuying bonds that they let roll off their balance sheet.

Okay… but bond purchases… ARE bond purchases. And the goals of Quantitative Easing are being accomplished - keeping rates in check (for now) and stabilizing the system.

They're tightening with one hand and buying with the other, hoping nobody notices.

But…

The Fed doesn’t have me raising my right eyebrow anymore.

After 2022 and 2023, we saw that they’d go to whatever lengths necessary to stabilize the system and then call it a day.

Which is why my left eyebrow raised at this…

Tether - that stablecoin company nobody can properly audit - owns about $125 billion in U.S. Treasuries.

This crypto outfit has 50 employees, is based in the British Virgin Islands, has zero U.S. banking licenses, and is as transparent as a concrete wall.

Yet, it owns more American debt than Germany. Or Spain. Or Australia.

This is a shadow central bank operating from a tax haven.

The Treasury Department seems fine with selling America's debt to anyone with a pulse and a wire transfer.

But that’s not the only outfit the U.S. tolerates to keep debt demand elevated.

Hedge funds can use 50x leverage to play games with Treasury bonds through a strategy called the "basis trade." They borrow money at near-zero rates to exploit tiny price differences between cash bonds and futures.

JPMorgan estimates there's over $650 billion tied up in this trade. So now we've got hedge funds treating the foundation of global finance like a high-stakes poker game.

Remember Long-Term Capital Management?

Yeah, that worked out great, too.

Meanwhile, foreign governments are quietly backing away. But money market funds have become the new biggest buyers, parking over $6 trillion in short-term paper.

So now BlackRock and Fidelity are major creditors to the U.S. government.

These aren't institutions bound by diplomatic considerations or strategic alliances.

They’re just playing the shell game and watching the door.

Here’s What’s Coming

Over $9 trillion in U.S. debt matures in the next 12 months.

That's roughly one-third of all government debt that needs to be refinanced at much higher interest rates.

It's happening right now. The government isn't paying down debt.

It's just constantly refinancing like someone trapped in a payday loan cycle.

Meanwhile, pension funds still use risk models built for a world where bonds hedge stock risk. That theory was completely demolished in 2022 when stocks and bonds crashed simultaneously. If they still operate under this assumption, they’re in for a rude awakening come 2026.

The Market Mirage

Remember March 2020?

Everyone talks about it like it was just a pandemic panic, but here's what happened:

The Treasury market - the most liquid market in the world - seized up.

Dealers couldn't make markets. The Fed had to step in with unlimited buying to keep the system from imploding.

That wasn't a COVID problem. That was a structural problem with a COVID catalyst.

Yet, through all that madness, financial advisors still tell people, "When things get scary, just move to cash and Treasuries."

The problem is that both are part of an asset class that’s now:

• Propped up by crypto companies with questionable books

• Gamed by leveraged hedge funds

• Backstopped by a central bank playing both sides

• Owned increasingly by entities that will sell at the first sign of trouble

That's not a safe haven.

How to Prepare Before It Gets Ugly

The real winners in all of this are sovereign wealth funds in the Middle East and Asia.

They're taking U.S. dollars from Treasury investments and buying real assets—ports, pipelines, minerals, and land.

They lend us paper money and take control of actual stuff.

It's the equivalent of trading beads for Manhattan… except we're giving away the island.

I'm not saying the system is going to collapse tomorrow. I'm saying it's already collapsing in slow motion, and everyone's pretending not to notice.

\You can't run $2 trillion to $3 trillion deficits forever.

You can't refinance your entire debt at higher rates indefinitely.

You can't depend on shadow banks and crypto firms to fund your government...

At some point, something gives… And when it does, all those people who thought they were playing it safe will find out they were actually the last ones holding the bag.

The Treasury market isn't the bedrock of global finance anymore.

It's a Jenga tower held together by duct tape, delusion, and the promise not to ask too many questions.

I’m not interested in that…

So, follow the sovereign model. Buy assets. Buy real things.

Get your fingers in the dirt.

And stay positive,

Garrett Baldwin