JPMorgan's Sullivan says the Treasury's doubled buyback program only delays the day when $40 trillion in U.S. debt must find buyers as foreign buyers retreat.
Alpha Score of 64 reflects moderate overall profile with moderate momentum, moderate value, moderate quality, moderate sentiment.
JPMorgan's James Sullivan likened the Treasury's expanding debt buyback program to paying a mortgage with a credit card. It works temporarily. The underlying mismatch eventually becomes obvious.
The Treasury Department, led by Scott Bessent, said Wednesday it would at least double the size of its government debt buybacks. Operations run Sept. 9 through Nov. 4. Buybacks are designed to support liquidity in older, off-the-run Treasury securities. The program buys longer-duration bonds while the government issues shorter-dated bills. Sullivan described the strategy as refinancing longer-term obligations with shorter-term borrowing. The approach can provide temporary relief, Sullivan said. The underlying debt burden stays intact. The move shifts the maturity profile of U.S. debt without reducing the total amount that must eventually be sold.
"It's a little bit like paying your mortgage with your credit card. It can work for a while, but eventually the mismatch starts to become more obvious," Sullivan, JPMorgan's co-head of global fundamental research, told CNBC's "Squawk Box" on Friday.
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The buyback plan may hold down borrowing costs for now. Sullivan's concern is that it does little to address the bigger problem: a mounting wall of government and corporate debt that still needs buyers. The challenge reaches well beyond the U.S. Sullivan put U.S. government debt at roughly $40 trillion and developed-market government debt at about $76 trillion. Corporate issuance, Sullivan said, is also at record levels. The combination, Sullivan said, leaves the market facing a larger supply pipeline just as some traditional buyers retreat.
"Governments trying to control markets is not a particularly attractive story most of the time," Sullivan said.
Even with solid economic fundamentals, the sheer increase in bond supply matters for markets, Sullivan said. More debt needs to find buyers, and that may force issuers to offer more attractive yields. Traditional buyers are stepping back. China's Treasury holdings are at an 18-year low, and foreign-government custody holdings at U.S. banks are at a 14-year low. Yields now have to clear the extra supply.
"The only way you balance supply and demand is through price," Sullivan said.
Corporations are also tapping debt markets heavily. Economic growth has become increasingly capital-intensive, Sullivan said. Spending on data centers and other AI infrastructure is one driver; reshoring and national-security-related investment add to the load. Leading AI companies have issued $200 billion of debt so far this year, up 80% from a year earlier, according to Sullivan. The borrowing adds to the broader competition for capital, Sullivan said.
Higher bond yields also complicate the stock picture. Yields are now above the earnings yield on the S&P 500, according to JPMorgan data, making fixed income more competitive with equities when valuations are elevated.
"The asset allocation decision becomes significantly more complex going forward as we see these environments play out," Sullivan said.
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