Former Treasury Secretary Henry Paulson urged authorities to develop an emergency response plan in case demand for U.S. government bonds falls sharply.

Paulson’s warning

Paulson warned that a sudden shift in investor appetite would have broad implications because the market totals about $31 trillion, a foundation of the global financial system.

«very severe»

He said that the consequences could be "very severe", highlighting the need for contingency planning to preserve market functioning and financial stability.

How a debt spiral could form

If investors demand higher yields, the government’s cost of servicing debt will rise, increasing the deficit and accelerating debt accumulation in turn.

• Higher yields raise interest expenses on outstanding securities and new issuance, putting pressure on fiscal balances.
• An expanding deficit can lead to larger government borrowing needs, further increasing supply and upward pressure on yields.
• Rising yields can slow economic growth, which reduces revenues and complicates debt sustainability efforts.

Policy choices and market risks

Paulson called for an urgent review of tools and measures that could be deployed to support liquidity and stabilise the market if demand weakens materially.

He also noted that coordination between fiscal authorities and market operators would be essential to prevent contagion and preserve confidence across global financial markets.

Scale and implications

Given the market’s size, disruptions in U.S. sovereign debt would transmit quickly across banking systems, asset prices and funding conditions worldwide.

Preparations for potential stress scenarios, including contingency plans and communication strategies, aim to reduce the likelihood of abrupt market dislocations.