Rather than heed Sir Tony, Labour is flirting with another variant of build-a- PM. Campaigning in Makerfield, where through a by-election on June 18th he is hoping to return to Parliament, Andy Burnham is triangulating. The most likely successor to Sir Keir has backed Ms Mahmood’s immigration reforms and called for Labour to double down on left-wing economics. It will take more than switching the messenger to save Labour. ■ Subscribers to The Economist can sign up to our Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence. This article was downloaded by zlibrary from https://www.economist.com//britain/2026/06/04/build-a-prime-minister
The special role of the Treasury market is in peril Foreign demand for American government debt is becoming much less reliable Like it or not, hedge funds are a permanent part of the Treasury market Partners in prime: The Fed and Treasury’s new relationship Neither banks nor stablecoins will rescue the Treasury market Could something replace the Treasury market? Imagining a world without a safe asset
The special role of the Treasury market is in peril Government debt, inflation and unpredictable policymaking are putting the world’s most important asset under threat, argues Mike Bird in a
June 4th 2026 IT IS THE nightmare scenario for any market: everyone rushes for the exits at the same time and trading seizes up. That kind of crunch was not thought to be possible in the most liquid market in the world. But in early 2020, as the covid-19 pandemic took hold and the global economy faltered, many companies, governments and individuals found themselves in need of immediate cash as their regular income dried up. The easiest asset to sell, precisely because of the supposed liquidity of the market, was American Treasury bonds.
Although Treasury prices usually rise in times of sudden stress in riskier markets, they instead began to slump, with few buyers on the other side of the wave of selling. Big banks, usually the biggest dealers in Treasury bonds, were feeling the pinch themselves, and so did not step in to facilitate the “dash for cash”. Suddenly, an investment considered to be the ultimate safe asset, against which many of the world’s other financial assets are priced, was becoming hard to sell. To stop the market from freezing up completely, the Federal Reserve had to start buying, eventually acquiring trillions of dollars in American government debt. The episode was the opposite of what Alexander Hamilton had in mind in 1790 when, as America’s first Secretary of the Treasury, he convinced sceptical colleagues that the federal government should take on the war debts of the new country’s 13 states. The United States duly issued open- ended securities that paid 6% a year in interest—the first true Treasury bonds. At the time, British government bonds were the world’s most easily traded financial asset, and Hamilton looked at London’s debt market with envy. Public debt, he felt, had to be secure and transferable. Such a market, he argued, attracts investors, and so reduces interest rates for everyone, not just the government. In modern terms, Hamilton dreamed of liquidity. A market is liquid when an investor can buy or sell an asset whenever they want, safely and cheaply, with full knowledge of prevailing prices. In normal times no market on Earth promises more liquidity than the one for securities issued by the US Treasury. It is a near-$32trn colossus—vastly bigger than any other market for sovereign debt. The bonds are not just America’s safe asset, but the world’s. Discussions of how to price risk begin by comparison with the Treasury market. It is the lodestar of the global financial system.
Given its exalted status, it is striking how fast the Treasury market is changing. Over the past three years, the value of Treasuries outstanding has grown by 8% a year on average (see chart). Two decades ago America accounted for 38% of the government debt of the G7, a club of the world’s biggest rich economies. Now it accounts for 60%. In less than ten years the Treasury market is projected to grow to $50trn, over 60% bigger than today. As the market has ballooned, the participants have changed, too. The most dependable investors—banks buying to satisfy regulatory requirements, foreign central banks building warchests for currency crises, or the Federal Reserve itself—own less than a third of Treasuries, the lowest share in 30 years. They have been supplanted by buyers seeking returns rather than security. Hedge funds borrow against Treasury bonds to turn tiny opportunities for arbitrage into bigger gains. Insurers and pension funds are also big buyers, but their appetite depends on yields elsewhere, fluctuating exchange rates and the cost of currency hedges. The return of inflation in recent years, meanwhile, has dimmed the appeal of Treasuries for investors who want protection from stockmarket sell-offs. Since 2021 the prices of stocks and bonds have often fallen at the same time, driven by fears of rising interest rates. It happened again this year. Between the start of America’s strikes on Iran and March 30th, the S&P 500 dropped
by 8%, while yields on ten-year bonds rose from 4% to 4.3% (bond yields rise as their prices fall). It is not just rising rates, however, that are undermining Treasuries’ status as a safe haven; it is also policy-making caprice. Last year yields again rose as stocks declined when Donald Trump imposed swingeing tariffs on American allies and foes alike. Some foreign investors worry that one day, a similarly pugnacious administration might tax or otherwise meddle with their Treasury holdings. The theatrical dramas surrounding congressional budget negotiations, in which one or other of the two big parties regularly threatens to force an unnecessary default, reinforce such concerns. So does the slow deterioration of America’s credit rating: last year Moody’s demoted the federal government from triple-A, its highest rank. The firm’s big rivals had already done so. America’s regulators, still a capable lot, have not been blind to the risks. They have opened permanent channels to allow banks and foreign central banks to borrow against the value of their Treasuries, boosting liquidity. Soon, much of the trading in Treasuries and borrowing against them will be conducted through a central clearing house, reducing the risk of sudden blow-ups. But like cartoon characters rapidly laying new railway tracks to keep a speeding train on course, regulators are making these rules as the market grows and changes. How well the rules work will become clear only during the next period of immense stress. And stress is becoming more common. There have been several worrying episodes in recent years, in addition to the dash for cash. In September 2019 and in March 2023 the Federal Reserve intervened in funding markets to restore liquidity. Each of the individual changes affecting the market—the rapidly mounting debt, the resurgent inflation, the quixotic policymaking, the intermittent seizures—is a concern for global investors. Taken together, they are cause for alarm. The risk is not so much, or not chiefly, that America might default on its debt. Rather, this special report will argue, the fear is that the Treasury market might gradually forfeit its status as the guiding light of global finance. That would make it more expensive for America’s government to
borrow. And since there is no good alternative to Treasuries, it would make the entire global financial system wobblier and riskier. ■ This article was downloaded by zlibrary from https://www.economist.com//special-report/2026/06/01/the-special-role-of-the- treasury-market-is-in-peril
Foreign demand for American government debt is becoming much less reliable A once-vital source of funding for the Treasury market is drying up June 4th 2026 In 1974, soon after the first oil shock, William Simon, America’s treasury secretary, flew to Jeddah to sign a secret deal with the king of Saudi Arabia. Among other things, he promised the Saudi government preferential access to American Treasury bonds. In exchange, the regime agreed to invest some of its immense oil revenue in American public debt. Three years earlier Richard Nixon had ended the dollar’s convertibility to gold, ushering in an era of floating currencies. Central banks found themselves having to manage exchange rates. Foreign states stocked up on Treasury bonds in part to stop their currencies from appreciating against the
dollar. America’s government needed foreign buyers, too: the more customers for its debt, the lower the interest it had to pay. America’s financial bureaucrats offered a sweet deal: the chance to bid for Treasuries at private auctions, with favourable tax treatment. Although the Saudis never became big buyers, foreign states bought $2.3trn of Treasuries in the 2000s, bringing their holdings to $2.9trn, after currency crises convinced Asian governments in particular that they needed stockpiles of dollar-denominated assets. If their currencies started sliding, the logic ran, they could stem the decline by selling Treasuries to buy domestic assets. The largest stash was in China, which at its peak in 2013 owned $1.3trn in Treasury bonds. They were mostly held by the People’s Bank of China, which used purchases and sales of American government bonds to manage the value of the yuan. Many other countries did the same. In 2008 the share of American federal debt held by foreign governments peaked at 38%. These purchases were a big boon. Among the largest estimates of their effect comes from Rashad Ahmed of the Andersen Institute, a think-tank, and Alessandro Rebucci of Johns Hopkins University. They suggest that an unexpected $100bn investment by a foreign government can lower ten-year Treasury yields by a percentage point when it occurs, declining to about half a percentage point after a year. What is more, foreign governments do not invest in Treasuries to make money, by and large. They want dollar assets simply as a precaution, to help defend their currencies if need be. That makes them an enviably staid, dependable source of funding. However, for almost 20 years, the role of foreign governments in the Treasury market has been slowly shrivelling. They now hold just 13% of Treasuries, the lowest share in 30 years. In part, that reflects central banks’ diversification. The dollar’s share in global foreign-exchange reserves has slipped from 71% in 2001 to around 57% last year. Some of the drop stems from the long-term strength of the dollar, since central banks tend to buy dollars when they are cheap and sell when they are expensive, to keep their currencies from appreciating or depreciating too much. But the fall is also a function of the broader range of currencies central banks now hold. Their