A quarter of US debt matures this year. Issued at zero rates. Now has to refinance at 4–5%. Central banks stopped buying. The system can’t survive this.
3 Likes
Instead of clickbait “The system can’t survive this,” let’s look at the reality.
The system will always survive as long as the Fed can buy Treasury debt with fiat dollars from thin air. The question is what will actually happen.
The Treasury yield curve is already steep compared with the past few years. Short-term yields are low. But long-term yields have not declined despite the Federal Reserve cutting the fed funds rate.
-
Auction Sizes: Treasury announced it will keep auction sizes for nominal notes and bonds steady for at least the next several quarters, despite speculation that it might reduce long-term issuance to lower yields.
-
Bill Reliance: The department continues to rely heavily on short-term Treasury bills (maturing in one year or less) to fund increasing federal spending. This keeps borrowing costs low because the Fed can control the fed funds rate which is a short duration. But if inflation kicks up the Fed will be forced to raise the fed funds rate.
-
Interest Rate Environment: Markets expect the Federal Reserve to cut the fed funds rate to approximately 3.0%–3.5% by year-end 2026, which may provide some relief to refinancing costs at the short end of the curve.
What Treasury should have done was to lock in the low rates in 2020 by exchanging short-term debt for long-term debt. Too late now.
Following a plan of continuously rolling over short-term borrowing is doable. But it’s kicking the inflationary can down the road and betting that the fed funds rate will stay low…or even drop to 1% as President Trump is demanding.
Wendy
8 Likes
There was/is low demand for decade+ bonds with near-zero interest rates. Which makes sense to me.
In addition, selling large(r) quantities of long-term bonds lowers their prices and raises their interest rates.
DB2
3 Likes
I used to say the same thing, but then I realized that it may not have been possible in reality. Let’s say they issued $1-2T in long-term debt during that period of low rates. What if they had issued $5-7T instead? Sounds easy, but it isn’t. If the supply of long-term debt suddenly rises so much, and the demand only rises a little, the “price” will go up. And the price of debt is the interest rate. So long-term rates would have gone up. Meanwhile they were trying mightily to keep short term rates as low as possible (by having the Fed endlessly buy cheap debt). So instead of 30 year treasuries at 2-3%, they may have been at 4-5% or likely even higher. Now if you say that the Fed would have bought those long-term treasuries at lower rates, well, then it doesn’t really matter which debt you issue if the Fed is buying “all of it”.
5 Likes
Yes, it’s a veritable perpetual motion machine.
The same thing that always happens with perpetual motion machines, the question is when, and where are the exits?
3 Likes
I hope that it is just clickbait, but it’s a bit more serious than that - almost $1 trillion in interest and set to rise rapidly:
As the national debt continues to climb toward record levels – totaling 100% of Gross Domestic Product (GDP) at the end of Fiscal Year (FY) 2025 – interest on the national debt has also risen significantly. Just five years ago, in FY 2020, net interest totaled $345 billion; in FY 2025, it totaled $970 billion – nearly three times as large…
… Over the coming decade, we project that these figures will only rise, with interest payments surpassing $1.5 trillion in 2032 and $1.8 trillion in 2035.
Military spending for the USA in 2025 was $893 billion:
Those printing presses will be running red hot 
Let’s not take it quite that extreme. Instead of going from 1-2T to 5-7T, maybe just go to 2-3T. Reminder, this was during a period of time when safe sovereign debt was in such high demand that some people were willing to accept negative yield on it.
Besides, this is something that could have easily been tried in smaller amounts to control the impact so that rates did not climb to 4-5% or higher as you theorize. The road from 2% to 5% on long term yields is long and not so easily achieved overnight by injecting a little more debt.
3 Likes
I agree that there will be red-hot printing presses.
Historically, countries that ran red-hot printing presses ended up with red-hot inflation.
Wendy
A partial solution is to raise taxes. Reinstate the estate tax. Don’t have so many loopholes and “gimmes” in the tax code.
Also, don’t chase the rabbit. Military spending is often cited as a huge problem. But that isn’t the problem. If you eliminated the entire defense department, and shuttered the Pentagon, and sent everyone home, you still wouldn’t eliminate the deficit. The biggest expenditures are SS, Medicare and Medicaid (accounting for at least 75% of “mandatory” spending). “Mandatory spending” is the bulk of the US budget. Defense is less than half of the “discretionary spending”. Eliminated funding for CPB (for example) wasn’t even up to the level of a rounding error. It was the change you find in your couch cushions.
We expect our government to do several things. Try cutting SS, Medicare, Medicaid, or any of a number of other vital programs, and you’ll have riots in the streets. The answer is to starting appropriate taxing to pay for these things we value. Contrary to some ideologues, cutting taxes doesn’t give you more revenue.
4 Likes
There was a time some people were arguing that US treasury should issue some 50 year, even 100 year bonds, because there is some debt that is not going to go away. There was lot of demand especially with EU having negative rates.
3 Likes