By Frances Yue
The plan should be 'ready to go' for 'when we hit the wall,' Paulson said
Henry Paulson said a crisis in the Treasury market now would differ in a crucial way from the 2008 financial meltdown.
Former Treasury Secretary Henry Paulson on Thursday urged U.S. policymakers to prepare an emergency plan in case demand for Treasurys breaks down - warning that a crisis in the government bond market could trigger severe consequences across the economy.
&#34;We need an emergency break-the-glass plan which is targeted and short term on the shelf, so it's ready to go when we hit the wall,&#34; Paulson said in an interview with Bloomberg Television's Wall Street Week on Thursday.
Paulson's warning comes as investors grow increasingly concerned about the waning appeal of U.S. Treasury debt. Persistent deficits, heavy debt issuance and inflation worries have weighed on longer-term government bonds recently.
Paulson said a crisis in the Treasury market would differ in a crucial way from the 2008 financial meltdown, when the U.S. government still had enough fiscal capacity to step in and contain the damage. This time, instead of centering around the private sector, a Treasury crisis could hamper the government's ability to finance itself.
In 2008, &#34;as bad as it was,&#34; the government had fiscal firepower to address the credit meltdown,&#34; Paulson noted. &#34;You can come in and clean up the mess.&#34;
Nevertheless, in a public-debt crisis, &#34;when you hit the wall and you're trying to issue Treasurys, and the Fed is the only buyer and the prices of the Treasurys are going down and interest rates are up, that's a dangerous thing.&#34;
In other words, if demand for Treasurys drops significantly, investors may ask for higher yields before buying more. That would make it more expensive for the government to borrow, and those bigger interest payments would make the deficit even larger, which gives investors another reason to worry.
Still, Paulson said it's hard for him to predict a timeline regarding when such a crisis might eventually happen.
&#34;People say, 'When are you going to hit the wall?' I obviously don't know - it's impossible to know,&#34; he told Bloomberg. &#34;When we hit it, it will be vicious, so we have to prepare for that eventuality.&#34;
In a statement Thursday night, the Paulson Institute clarified that Paulson was &#34;clear that his concerns about the debt were not immediate and that he believed the U.S. economy remains the most resilient major economy in the world and is most able to withstand the uncertainty, including the impact of the war in Iran. He also noted that the dollar is indeed stronger in the wake of the current situation.&#34;
The 10-year Treasury yield BX:TMUBMUSD10Y rose 2.9 basis points to end at 4.308% on Thursday, while the 30-year Treasury yield BX:TMUBMUSD30Y climbed 3.9 basis points to 4.929%.
-Frances Yue
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04-17-26 0539ET

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Former Treasury Secretary Henry Paulson has warned that the U.S. needs an emergency 'break-the-glass' plan to address a potential collapse in demand for Treasurys. He emphasized that such a crisis would differ from the 2008 financial meltdown, as the government may lack the fiscal capacity to respond effectively. Paulson noted that a significant drop in Treasury demand could lead to higher yields, increasing borrowing costs and exacerbating the deficit. While he believes the U.S. economy remains resilient, he stressed the importance of preparing for this eventuality.

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Former Treasury Secretary Henry Paulson warns U.S. needs an emergency 'break-the-glass' plan if Treasury demand collapses