U.S. Treasury Secretary Janet Yellen's strategy of relying heavily on short-term debt financing could create significant market turbulence as President-elect Donald Trump prepares to take office, according to financial experts and market data.
What Happened: Charles Gasparino, New York Post columnist, warned that Yellen's approach of rolling over short-term debt instead of issuing longer-dated bonds has "masked the severity" of the federal deficit problem while potentially setting up a crisis for the incoming administration.
The Treasury Department under Yellen has shifted approximately 30% of government borrowing to short-term securities, up from 15% in 2023, according to analysis from Bear Traps Report. This strategy helped keep interest rates artificially low during Biden's term but could backfire as these debts need refinancing at higher rates.
"Traders will demand much higher rates to issue long-term debt, which will blow out interest rates on credit cards, mortgages etc. That means recession or worse," Gasparino wrote on X, formerly Twitter.
Side note to my column; a few weeks ago I wrote about the other ticking time bomb–Yellen papering the deficit by rolling over short term debt . It's worth noting that the severity of the debt problem has been masked because Yellen didn't issue 10-year...
— Charles Gasparino (@CGasparino) January 5, 2025
Market reactions are already visible. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) saw record outflows of $5.5 billion in December, while 30-year Treasury yields surged 40 basis points to 4.80%, reaching their highest level in over a year.
Why It Matters: Ed Yardeni, president of Yardeni Research, said "Bond vigilantes are sending a loud warning message" about fiscal concerns under the incoming administration. The 10-year Treasury yield has jumped from 3.6% in September to 4.6% in late December, a 25% increase that could significantly impact stock market performance.
The situation presents an immediate challenge for Trump's nominee for Treasury Secretary, Scott Bessent, who will need to address both the rolling short-term debt and a federal budget deficit that has contributed to $36 trillion in total government debt.
"Your costs explode and buyers could balk," Gasparino cautioned, highlighting the potential double threat of higher refinancing costs and reduced market appetite for U.S. debt securities.
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Image via World Bank / Brandon Payne
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
