The US may be where the bond bubble bursts thanks to 'aggressive debt issuance,' investor warns

  • Rapidly mounting debt in the U.S. may be the trigger that bursts the bond bubble, Oaktree Capital Management's director Jordon Kruse told CNBC.
  • Several Wall Street observers have warned that a collapse in the debt market could be particularly nasty because current debt levels are so massive.
  • The U.S. Treasury is set to issue nearly $1 trillion in debt in 2018, due in large part to the Trump administration's massive new stimulus programs requiring vast sums of borrowed money.

Rapidly mounting debt in the U.S. may be the trigger that bursts the bond bubble, one private equity investor told CNBC on Wednesday, echoing concerns of financial veterans Alan Greenspan and Paul Tudor Jones.

Asked where he expected the catalyst to come from amid a gradually quickening bond sell-off, Jordon Kruse, managing director at Oaktree Capital Management said, "It wouldn't surprise me if it started off in the States."

This is because "the aggressive nature of debt issuance in the last 10 years since the financial crisis is such that you have a very full market with a lot of fast money that's invested in debt," Kruse explained, naming exchange-traded funds (ETFs) and collateralized loan obligations (CLOs) as some of these investments.

Several Wall Street observers have warned that a collapse in the debt market could be particularly nasty because current debt levels are so massive.

"There is almost twice as much non-investment grade debt outstanding today as there was in 2007, and it's about $2.4 trillion," Kruse, who runs a U.S. distressed private equity fund, said. "So the kindling for the fire is there, it's just a question of what the trigger is."

The U.S. Treasury is set to issue nearly $1 trillion in debt in 2018, due in large part to the Trump administration's massive new stimulus programs requiring vast sums of borrowed money. Many fear this issuance is ill-fated, given the recent surge in U.S. yields and Federal Reserve plans to raise interest rates and withdraw liquidity from the market after years of quantitative easing.

Steven Mnuchin, U.S. Treasury secretary, gestures while standing next to a printing plate for $1 dollar notes bearing Mnuchin's name at the U.S. Bureau of Engraving and Printing in Washington, D.C., U.S., on Wednesday, Nov. 15, 2017.
Andrew Harrer | Bloomberg | Getty Images
Steven Mnuchin, U.S. Treasury secretary, gestures while standing next to a printing plate for $1 dollar notes bearing Mnuchin's name at the U.S. Bureau of Engraving and Printing in Washington, D.C., U.S., on Wednesday, Nov. 15, 2017.

U.S. Treasury yields have been steadily climbing over the last several months as the market anticipates interest rate hikes on the back of stronger wage growth and economic data. February saw the yield on the 10-year treasury bond hit four-year highs. Bond yields move inversely to prices.

Trepidation over mounting debt is not new; numerous CEOs and finance officials have cited greater leverage across both emerging and advanced economies as among the greatest threats to global economic stability. Goldman Sachs recently described U.S. federal deficit spending as headed into "uncharted territory."

And U.S. National Intelligence Director Dan Coats labeled the nation's debt — up to $20.7 trillion and set to rise thanks to Congress's recently passed fiscal plans — a "dire threat" to the nation's security.

"We always look at what causes cycles in the debt market; it's always obvious in retrospect, but at the front end we never really know what causes it," Kruse said, adding that U.S. political risk and broader geopolitical risk are also factors.

"The answer is we have a lot of debt outstanding in the U.S. right now. The market's been very strong for a very long time — when it starts to break down, that's when we can attack."