Former US Treasury Secretary Henry Paulson has issued a warning, calling on American policymakers to develop contingency plans in advance to prepare for a potential collapse in demand for US Treasury bonds. He cautioned that a crisis in the government bond market would severely impact the overall economy.

In a Bloomberg Television interview, Paulson stated that a targeted, short-term "break glass" emergency plan needs to be readily available and prepared for immediate activation if a crisis hits. He admitted that predicting the exact timing of such a crisis is difficult, but emphasized that its impact would be severe, making preparedness essential.

Paulson's warning comes amid growing investor concern over declining attractiveness of US Treasuries. On the day of his remarks, the yield on the 10-year US Treasury note rose by 2.9 basis points to 4.308%, while the 30-year bond yield climbed 3.9 basis points to 4.929%.

Paulson highlighted a key difference between a potential US Treasury market crisis and the 2008 financial crisis. The 2008 crisis was centered in the private sector, and the US government still had sufficient fiscal capacity to intervene and manage the fallout. In contrast, a public debt crisis would severely constrain the government's own financing ability, preventing it from acting as rescuer.

He described a potential vicious cycle: if the government faces insufficient demand when issuing bonds, investors would demand higher yields, increasing borrowing costs. Higher interest payments would then widen the fiscal deficit, further fueling investor anxiety. Paulson warned that a scenario where the Federal Reserve becomes the sole buyer, bond prices fall, and interest rates rise would be extremely dangerous.

Paulson's alert reflects multiple structural pressures currently facing the US Treasury market. Persistently large fiscal deficits, massive debt issuance, and ongoing inflation concerns have recently weighed heavily on long-term US Treasuries. Against this backdrop, investor skepticism about the long-term appeal of US debt is deepening. While Paulson did not provide a specific timeline for a potential crisis, he stressed that the risk cannot be ignored and proactive policy preparation is crucial.