By Karen Brettell
NEW YORK (Reuters) – Longer-term U.S. Treasury yields rose to their highest level in several months, outpacing the rise in shorter-term yields, with some of the disparity reflecting expectations that the incoming administration -Trump’s current focus on confidence will have to change more about short-term debt, traders say.
President Joe Biden’s Treasury Secretary Janet Yellen has increased sales of Treasury bonds, whose debt matures in a year or less, which have seen strong demand from money market investors.
But that has pushed the share of bills above the recommended level for total outstanding debt, a process that will likely need to be addressed by newly elected US President Donald Trump’s nominee, Scott Bessent.
“The market is building more term premiums on the long side to take into account the fiscal position, the budget deficit and potentially a lot more emissions on the long side of the curve as they unwind Yellen policies,” said Dan Mulholland, head of rates. – trading and sales at Crews & Associates.
Ten-year yields were lower than two-year bonds until about September and have risen at a faster pace since June. The 10-year yield reached 4.73% on Wednesday, the highest level since April, while the two-year yield remained relatively stable at 4.27%.
Traders say the glut of short-term debt was a factor that kept the U.S. Treasury yield curve inverted for longer than usual, from about July 2022 to September, which has now been inverted.
“That kept the yield curve inverted, and now I think there’s a sense that that’s not the way to do it,” said Tom di Galoma, head of fixed income trading at Curvature Securities.
An expected increase in longer-term debt is not the only factor pushing interest rates higher. Trump’s policies are expected to boost growth and possibly inflation, both of which will lead to higher interest rates.
The Treasury Department often uses the sale of short-term debt as a kind of shock absorber that it can increase or decrease when it experiences large swings in its financing needs. But in the longer term, market observers say it is unwise to rely too much on short-term debt as it increases refinancing risks if market conditions change.
Outstanding national debt has risen from $23 trillion at the end of 2019 to $36 trillion as the government relies more on debt to finance spending and close its budget deficit, which analysts say will continue to worsen for the foreseeable future.
Treasury bills now represent 22% of debt, above the Treasury Borrowing Advisory Committee’s 15-20% recommendation.
They reached 25% in 2020 as the government ramped up spending related to COVID-related business closures. They then fell to around 15% in 2022, but have since accounted for a larger share of total debt issuance.
While the Treasury Department is not expected to immediately increase auctions of longer-term debt, market participants have begun pricing in the likely event and will monitor the U.S. government’s quarterly repayment announcements for signals on when they are likely to occur. start.
“Trump’s Treasury Secretary won’t disrupt the market by suddenly changing auction sizes, but we could see announcements for higher coupon auction sizes in late April or early May,” said Will Compernolle, a macroeconomist. strategist at FHN Financial. He added that the increase in longer-term debt could start in the summer.
(Reporting by Karen Brettell; Editing by Alden Bentley and Mark Heinrich)
