The First Domino Has Fallen

The cascade we predicted in Two Wars is starting.

The United Arab Emirates is not broke.

It has roughly $95 billion in U.S. Treasury bonds, hundreds of billions in foreign exchange reserves, and access to trillions more through its sovereign wealth funds.

So why did it just ask Washington for an emergency loan?

Because this is not really about whether the UAE has money.

It is about what the UAE would have to sell to get that money.

And that brings us to the pressure point I wrote about two weeks ago: the U.S. Treasury market.

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Here is a quick recap before we dive in:

Two weeks ago, in Two Wars, I wrote about a vulnerability in the U.S. Treasury market that most investors do not think about, but that I am now convinced will define the next twelve months of market activity.

The mechanism is simple.

When the U.S. government spends more money than it collects in taxes - which it does every single year, to the tune of trillions of dollars - it borrows the difference. It does this by selling IOUs called Treasury bonds.

A “10-year Treasury” is simply a promise from the U.S. government to pay you back in ten years, with interest. These bonds are considered the safest investment in the world because, in theory, the U.S. government will always pay its debts.

Here’s why this matters right now.

Countries around the world - Japan, the UK, China, South Korea, and dozens of others - hold roughly $9.4 trillion worth of these American IOUs. They bought them because Treasuries are safe, liquid, and denominated in dollars.

For decades, this system worked beautifully.

The U.S. borrowed cheaply. Foreign governments parked their savings in a safe asset. Everyone won.

Until everyone needs cash at the same time...

Let me ask you a question.

If you were running Japan’s central bank, and your country was suddenly staring down an energy crisis that threatened to shut down factories, power plants, and shipping routes - and you needed dollars immediately to buy oil on the open market - what would you sell first?

You would sell the most liquid dollar asset you owned.

You would sell U.S. Treasuries.

And that is exactly what is happening.

Foreign central bank holdings of Treasuries at the New York Federal Reserve have dropped to their lowest level since 2012. The decline began the month the war started. Countries short on energy and desperate for dollars are selling American government bonds to raise cash to pay for fuel.

Japan holds $1.2 trillion in Treasuries. The United Kingdom holds $895 billion. These are not small positions.

Now here is the problem.

When lots of people sell the same asset at the same time, the price drops. When the price of a Treasury bond drops, its interest rate - what Wall Street calls the “yield” - goes up.

That yield is the incentive investors receive to lend money to the U.S. government.

And because Treasury yields set the baseline for borrowing costs across the entire economy, everything gets more expensive: Mortgages, car loans, corporate debt, and government refinancing.

All of it.

Let me take a minute to break this down simply.

Put me in the position of the U.S. government.

I spend more than I make, so I need to borrow cash.

Let’s say you loan me $1,000, and I agree to pay you 5% interest - $50 a year - for five years. You earn annual interest, and you get your $1,000 back at the end of the term.

Good deal.

But two years in, you get a cash call. You need your money back now.

The problem is, I do not owe you your $1,000 for another three years.

So you go looking for someone to buy the loan from you.

You find a third party and say:

Jay owes me $1,000. He is paying 5% a year, and the full amount is due in three years. If you buy this loan from me, the payments are yours.

But the third party can smell your desperation.

He says:

“I’ll take it - but I’m only paying you $800. You will not get full value, but you will get cash today, which is what you need.”

So you take the deal.

Now think about what just happened.

That third party just paid $800 for a note that will pay him $1,000 in three years, plus the $50 annual interest along the way. His effective return - his yield - just went up because he paid less for the same stream of payments.

Now imagine this happening at scale.

Not one lender, but entire countries - Japan, the UK, South Korea - all desperate for cash to buy oil, all selling U.S. Treasury bonds at the same time, all willing to take less than full value.

And we are not talking thousands.

We are talking trillions.

Here is why that matters.

The United States is still spending more than it earns, so it still needs to issue new debt. But if investors can buy existing Treasuries cheaply on the open market, why would they lend fresh money to the U.S. government at effectively lower rates?

They wouldn’t.

Nobody would.

So the government has to offer higher interest rates on new debt to attract buyers. That raises borrowing costs for Washington at exactly the moment it can least afford it.

And because Treasury yields anchor the entire credit system - mortgages, car loans, corporate debt - everything gets more expensive all at once.

This is the predicament.

The U.S. needs to offer higher interest rates to incentivize other countries to lend it money. But paradoxically, higher interest rates can break their own economy.

The prediction we came to was this:

The longer the Strait of Hormuz stays closed, the longer the list of countries running short on food and fuel will grow. That creates an ever-larger population of Treasury bondholders who may need to start selling.

And now we are beginning to see the first pieces of validation.

The first domino

In late April, the United Arab Emirates approached the U.S. Treasury and asked for a wartime financial lifeline.

The UAE is one of the foreign holders we wrote about. The Strait of Hormuz has been effectively closed for 12 weeks. As a result, the UAE cannot sell oil as it used to, and it has bills to pay.

But here is the thing.

The UAE is a fabulously wealthy country. It has not run out of money in the conventional sense.

It holds roughly $95.6 billion in U.S. Treasury bonds alone. It has approximately $270 billion in foreign exchange reserves overall, and it controls trillions more through its sovereign wealth funds.

So the UAE is far from broke. But its cash flow has stopped.

And when your cash flow stops, you dip into your savings.

If the UAE had sold its U.S. assets to raise the cash it needed, that would have meant unloading tens of billions of dollars in U.S. Treasuries onto the open market during an already stressed moment.

The price of those bonds would have dropped.

The yield on the 10-year Treasury would have climbed.

The exact spiral I described earlier would have begun, and the UAE would have been the country that started it.

So instead, the UAE did something different.

It approached Washington with a proposal:

We did not ask for this war. We were dragged into it. If we run short on cash and you do not help us, we will have no choice but to raise it ourselves - and you know what that means for your bond market. Let’s avoid this.

So the UAE asked for a short-term loan, known as a currency swap line - an emergency credit facility that allows the U.S. Federal Reserve to lend dollars directly to a foreign central bank.

This is not a bailout of the UAE. It is a bailout of the Treasury market.

Let me explain.

What is a swap line?

Let me take a minute to break this down, because everybody is going to be talking about swap lines in the months ahead, and very few people will actually understand them.

A swap line is, in technical terms, an emergency loan between two central banks.

The U.S. Federal Reserve agrees to lend dollars to a foreign central bank. The foreign central bank pledges its own currency as collateral, locked at a fixed exchange rate. When the swap matures, the foreign central bank pays back the dollars with interest.

The exchange rate at maturity is the same as the rate at the start, regardless of how the currencies have moved in between.

Every swap line, or emergency credit facility, that the United States has offered in 2008 and 2020 has been repaid.

Sort of.

And as long as that is the case, they are not technically a bailout.

But I use the term “sort of” because, in 2013, the Federal Reserve quietly changed the terms on swap lines with five countries from temporary to permanent.

I am not sure there is a meaningful difference between a loan that is not repaid and a loan that does not mature.

But I will leave that with you.

I have another prediction.

Over the next year, the swap line program will expand dramatically, and with it, the standing roster of countries for which the United States has assumed responsibility during a dollar liquidity crisis.

If I am right, two things will happen.

First, the list of countries that the United States deems “eligible” for swap lines will grow.

It will expand beyond key U.S. allies like the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank, and begin to include a much wider net of less reliable partners with much less stable currencies.

And as the eligibility criteria drops, the fragility of the loan will rise.

Second, the number of swap lines that shift from temporary to permanent will also grow.

In that environment, swap lines do not get repaid in any meaningful sense.

They get rolled.

The Fed extends the maturity. The borrower draws a new swap to repay the old one. Each transaction shows as “repaid” on the books, but the aggregate balance never really goes down.

Wall Street has a name for this: Amend, extend, and pretend.

Amend the terms of the loan.

Extend the payment deadline.

Pretend everything is fine.

The evidence that this prediction is materializing will be simple:

The UAE gets its swap line approved. And Kuwait gets one next.

Why Kuwait?

Because oil revenues fund roughly ninety percent of Kuwait’s government budget.

Kuwait exported zero barrels of crude oil in April 2026 - for the first time in roughly thirty years. Kuwait Petroleum Corporation declared force majeure on its export contracts in March and extended it on April 20, telling clients it could not meet its contractual obligations even if the Strait of Hormuz reopens.

Kuwait holds $66.1 billion in U.S. Treasuries.

Read that again.

Kuwait now has zero oil revenue. Kuwait runs ninety percent of its government on oil revenue. Kuwait holds sixty-six billion dollars in U.S. Treasuries.

They will either sell their Treasuries, which is the trigger we wrote about in Two Wars, or they will follow the UAE’s lead and ask Washington for a swap line of their own.

Is a Swap Line a Bailout?

Critics will say swap lines are bailouts. US bulls will say they are not.

They are both right.

Because they are thinking about the bailout backwards.

A swap line looks like a bailout for the borrower because the borrower receives the dollars. But in this case, the real beneficiary is the lender.

Because what is the alternative?

The alternative is that dollar-starved countries sell the most liquid dollar asset they own: U.S. Treasuries.

They sell into a falling market. Treasury prices drop. Yields rise. Washington’s borrowing costs climb. Mortgages, car loans, corporate debt, and government refinancing all get more expensive at once.

That is the spiral.

So when the Fed opens a swap line, it is not merely helping a foreign central bank.

It is preventing that foreign central bank from becoming a forced seller of U.S. government debt.

This is not a bailout of the UAE.

It is a bailout of the Treasury market.

And if the Strait of Hormuz remains closed, the question is not whether more countries will need dollars.

They will.

The question is whether Washington chooses to let them sell Treasuries to raise those dollars, or quietly lends them the dollars first.

That is why the UAE matters. It is not the end of the story.

It is the first domino.

Honest question - what am I missing? Let me know in the comments.

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That’s it for today,

Jay Martin

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