U.S. Treasury Secretary Janet Yellen has been criticized by economists for increasing the issuance of short-term U.S. Treasury bills, as they believe Yellen intends to reduce the proportion of long-term U.S. bonds through this strategy, thereby lowering borrowing costs and artificially stimulating the economy in an election year.

Bloomberg reporter Robert Burgess wrote on Wednesday that the consequences of this move will leave Scott Bessent, the Treasury Secretary nominated by incoming U.S. President Donald Trump, sleepless. He believes that while Yellen may not be trying to manipulate market interest rates, her choice to increase the issuance of very short-term U.S. bonds has led to an unusually large amount of bonds maturing next year, which has now reached $6.74 trillion. This accounts for about one-quarter of the total $28 trillion in tradable U.S. government debt.

Yellen categorically denied the existence of a strategy to increase short-term bonds in an interview in July. Burgess believes that regardless of the original intention, this decision appeared quite reasonable at the time. Inflation rates in 2023 declined significantly and continued to fall rapidly in the first half of 2024. At that time, it seemed likely that the Federal Reserve would soon make substantial interest rate cuts, which would lower the interest costs of all maturing debt, saving taxpayers billions.

In addition, the presidential election is considered to be a close contest, leaving room for the possibility that Trump may fail to be re-elected and implement large-scale new tariffs. Most economists believe that new tariffs would reignite inflation and raise borrowing costs.

However, over time, these assumptions have completely fallen apart. Inflation has proven to be more stubborn than expected, and expectations for Federal Reserve interest rate cuts have significantly decreased. Meanwhile, Trump's successful re-election has increased the likelihood of imposing tariffs on major trading partners, further pushing inflation rates up. Derivatives market data shows that bond traders' expectations for inflation have risen by about one percentage point over the past few months, reaching the highest level since the beginning of 2023.

Burgess stated that all of this means that governments, businesses, and households will face higher borrowing costs. A monthly survey published by Bloomberg News on Friday, involving about 50 economists, showed that they expect the benchmark 10-year U.S. bond yield to reach 4.26% by the end of the first quarter of 2025, higher than the 3.80% predicted a month ago. Their yield forecasts for the remainder of next year have also risen compared to the October survey.

This issue is significant. In a letter to investors at Key Square Capital Management LLC in January of this year, Bessent wrote that if Trump is re-elected, "the biggest risk factor in preventing him from creating an 'economic feast'" will be "the sudden rise in long-term interest rates."

The Biden administration has faced widespread criticism for managing the skyrocketing cost of servicing usa bonds, which is one of the main reasons the federal budget deficit swelled to 1.8 trillion dollars (7% of GDP) for the fiscal year 2023. The government's net interest costs have doubled since 2020, rising from 345 billion dollars in fiscal year 2020 to 882 billion dollars in fiscal year 2024, while the next Treasury Secretary will likely find it nearly impossible to reverse this trend.

Bessent once described Yellen's decision to issue a larger proportion of short-term Treasury bills as a "risk strategy," and noted that it "comes with significant costs." He may shift toward issuing more medium- and long-term bonds. BNY Mellon strategists previously wrote in a research report that this change in the debt maturity structure would affect all maturities, "indicating that demand for long-term usa bonds will have to increase." They are concerned that there could be "massive withdrawals" or a "buyer strike."

Burgess analyzed that managing usa 36 trillion dollars in debt (of which 28 trillion dollars is marketable) is particularly tricky, as the structure of investors holding treasury bonds has changed significantly in recent years. According to data from jpmorgan strategists, the share of price-insensitive investors (such as the Federal Reserve and foreign central banks and governments) in the treasury market has fallen to about 50%, the lowest level since 1997. In 2015, this figure was around 75%. This means that more treasury bonds are now in the hands of investors, like hedge funds, who are more sensitive to changes in market conditions, which may lead to increased volatility and higher yields.

Burgess stated that Trump referred to himself as the "king of debt" and often boasted about how his business empire survived multiple difficult periods. He hopes Trump can guide the next Treasury Secretary through one of the most challenging periods in usa borrowing history.

Editor/Lambor