Treasury Secretary Janet Yellen came under fire this year from economists such as Nouriel “Dr. Doom” Roubini for stepping up the issuance of short-term Treasury bills. They essentially accused Yellen of undertaking the strategy in a deliberate effort to reduce the share of long-term Treasury notes and bonds, thereby suppressing borrowing costs and artificially juicing the economy in an election year. My Bloomberg Opinion colleague Jonathan Levin thoroughly debunked that conspiracy theory a few months ago.
Nevertheless, the debt management approach is not without consequences — consequences that will surely give Donald Trump’s pick for Treasury secretary, Scott Bessent, many sleepless nights. Although Yellen may not have been trying to manipulate market rates, the decision to boost issuance of very short-term debt means an unusually high amount of borrowing comes due next year — $6.74 trillion as of this writing. That represents about a quarter of the $28 trillion of total marketable US government debt outstanding. “I can assure you 100% that there is no such strategy,” Yellen told Bloomberg News in a July interview in response to a question about whether her goal had been to ease financial conditions. “We have never, ever discussed anything of the sort.”
Regardless of the intentions, the move made a lot of sense from afar. Inflation rates came way down in 2023 and continued their rapid decline in the first half of 2024. It looked like the Federal Reserve would soon start cutting interest rates fairly aggressively, which would result in lower interest costs when all that debt came due, saving taxpayers billions of dollars. (As a former chair of the Fed, Yellen has an excellent sense of how the central bank thinks and of monetary policy.) Plus, the presidential race was considered a toss-up, leaving plenty of room for the idea that Trump wouldn’t win reelection and the chance to enact hefty new tariffs, a plan that most all economists say would reignite inflation and boost borrowing costs.
Fast forward to today and those assumptions have turned out spectacularly wrong. Inflation has proved stickier than expected and the outlook for Fed rate cuts has been dialed back significantly. And Trump was reelected, raising the odds that he will inflict tariffs on China and our other major trading partners, perhaps pushing inflation rates even higher. The derivatives market shows the outlook for inflation rates among bond traders has risen about one percentage point over the last couple of months to around the highest levels since early 2023.
What all this means is higher borrowing costs for the government, companies and households. A monthly survey of around 50 economists released by Bloomberg News on Friday showed they now expect the yield on the benchmark 10-year Treasury note to end the first quarter of 2025 at around 4.26%, up from the 3.80% they forecast a month earlier. Their yield estimates for the rest of next year also rose from the October survey. This is no small matter. Writing in January to investors in his Key Square Capital Management LLC, Bessent said “the greatest risk factor” that would prevent Trump from creating an “economic lollapalooza” if reelected “would be a sudden rise in long-end rates.”
The Biden administration has taken a lot of heat for overseeing a spike in the cost of servicing US debt, which is a primary reason why the federal budget deficit swelled to $1.8 trillion in the fiscal year ended Sept. 30, or a lofty 7% of gross domestic product. The government’s net interest costs have more than doubled since 2020, to $882 billion in fiscal 2024 from $345 billion. It’s unlikely the next Treasury secretary will be able to reverse the trend.
Bessent, who has described Yellen’s decision to issue a greater proportion of bills as a “risky strategy” that “comes with significant costs,” may steer the Treasury toward more notes and bonds. A change in the maturity structure of debt issuance would have implications across all maturities, strategists at BNY Mellon wrote in a research note dated Nov. 26, “and suggests that demand for longer-dated US debt would have to increase.” They are concerned about “a wholesale retreat” from Treasuries and the potential for “a buyer’s strike.”
Managing the US’s $36 trillion of debt ($28 trillion of which is traded) is especially tricky because the makeup of investors owning Treasuries has changed greatly in recent years. The share of the Treasury market owned by what are considered price-insensitive buyers — such as the Federal Reserve and foreign central banks and governments — has dropped to around 50%, the lowest since 1997, according to the rates strategists at JPMorgan Chase & Co. Their share was about 75% as recently as 2015. This means that more Treasuries are in the hands of investors such as hedge funds that are more willing to sell in response to changing market conditions, potentially creating volatility and causing yields to remain higher than otherwise.
To be fair, managing the nation’s debt is never easy. Although Treasury officials have a philosophical approach to how much to borrow and in what maturities, they also want the ability to be flexible. In a June speech, Josh Frost, the Treasury’s assistant secretary for financial markets, explained in detail that the department issues debt in a “regular and predictable fashion as part of our strategy to borrow at the lowest cost over time.” Frost used the speech to rebut the idea that the Treasury violated guidelines that required it to keep the share of Treasury bill issuance in a range of 15% to 20% of all debt issuance. That range was suggested by the Treasury Borrowing Advisory Committee — a panel of dealers and investors that has advised the government on issuance strategy for decades. Frost said the Treasury thinks of that range as a useful rule of thumb, but not a hard-and-fast mandate.
Since 1980, Frost pointed out, the share of bills has been as high as 36% and as low as 10%, and has only been in the 15%-to-20% range about 13% of the time. That’s because bills are a “shock absorber” for ebbs and flows in borrowing needs over each quarter, he said at the time, according to Bloomberg News. He highlighted that TBAC itself had said last year that it was “comfortable running T-bills in the range of their longer-term historical share of 22.4% for some time” before returning to the 15%-to-20% range. Currently, bills comprise around 22% of total marketable government debt, according to BNY Mellon.
Trump has called himself the “King of Debt” when boasting about how his business empire survived multiple hard times. Here’s hoping he’s right and can guide the next Treasury secretary through what is sure to be one of the trickiest periods in the nation’s borrowing history.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Robert Burgess
