Inside today’s Daily Journal…

Editor’s note: Porter has turned the Journal over to Marty Fridson, lead analyst for Porter & Co.’s Distressed Investing. For nine consecutive years, Marty was ranked No. 1 in high-yield strategy… He brings those years of experience to today’s Journal about the weakening market for U.S. Treasuries.

Here’s Marty…

The U.S. government has spent its way into a collapse of the sovereign U.S. Treasury debt regime…

Like it or not, foreign companies and banks need dollars in order to do business. The problem for those foreign-dollar users is that U.S. bank regulations got tighter after the Global Financial Crisis in 2008.

That raised the cost for banks to provide dollar funding to the rest of the world. As a result, the premium paid by foreigners for directly accessing dollars went up. And the premium goes up even more when times get tough, as everybody clambers for dollar funding all at the same time.

So for now, at least, the rest of the world still wants dollars, and the Fed has been creating them with seemingly no limit. As one French finance minister famously put it in 1960: the U.S. currency still enjoys an “exorbitant privilege.” Neither the euro nor the Chinese yuan is on the verge of usurping its place in global trade.

For U.S. Treasury bonds, on the other hand, a grim future has already arrived.

To understand the math behind this grim future, imagine you’re a European investor who wants to earn a return in dollars. Buying a U.S. government bond is the simplest way to do so – but it’s not the only way.

You could instead buy a German government bond and use the foreign-exchange market to convert the euro-denominated interest to dollars. This is called a “synthetic” dollar investment.

Up until 2008, investors were usually willing to opt for accepting a lower yield to own U.S. government debt directly – Treasury bonds were the most liquid form of sovereign debt and everyone accepted them as collateral.

But those advantages disappeared as the total amount of marketable Treasury debt exploded from $6 trillion in 2008 to $30 trillion in 2025. To be clear, it’s no cause for panic when Treasury debt simply grows along with an expanding U.S. economy. But the 2008-2025 increase represented a 10% annual growth rate. Real (inflation-adjusted) GDP grew just 2.25% a year over the same period. In short, the federal government has been stepping up its production of debt much faster than U.S. workers and businesses have been stepping up the production of goods and services.

Investors haven’t missed the fact that the U.S. government has been spending and borrowing with reckless abandon. So instead of accepting a lower yield on Treasury bonds than on the synthetic variety described above, they’re now demanding a premium yield to lend to the U.S. government.

Up until 2023, Treasury bills, which are issued with maturities of one year or less, still enjoyed their special privilege, yielding less than comparable foreign obligations. No longer, thanks to the Treasury flooding the market with this near-cash type of paper. Between 2013 and 2019, the amount of Treasury bills outstanding expanded by 52%. In the next six years the amount ballooned 171%.