Rising Treasury yields reflect expectations of more long-term debt

Written by Karen Brettell

NEW YORK (Reuters) – Long-term U.S. Treasury yields rose to multi-month highs, outpacing the rise in shorter-term yields, with some of the variation reflecting expectations that the incoming Trump administration will need to change the current focus on credit reliance. Traders say more about short-term debt.

President Joe Biden’s Treasury Secretary, Janet Yellen, has increased sales of Treasury bills, debt maturing in one year or less, which has seen strong demand from money market investors.

But this resulted in a portion of the bills rising above recommended levels of total debt outstanding, a process that will likely need to be addressed by President-elect Donald Trump’s nominee for Treasury Secretary, Scott Besent.

“The market is increasing the term premium over the longer term to account for the fiscal position, deficits, and potentially more issuance at the long end of the curve as Yellen’s policy unwinds,” said Dan Mulholland, head of interest rates. – Merchandising and Sales at Crews & Associates.

Ten-year yields were lower than two-year yields until around September, and have been rising at a faster pace since June. Ten-year bond yields reached 4.73% on Wednesday, the highest level since April, while two-year yields remained relatively steady at 4.27%.

Traders say the abundant supply of short-term debt was a factor in keeping the US Treasury yield curve inverted for longer than usual, from roughly July 2022 to September, which is now inverting.

“That kept the yield curve inverted, and now I think there’s a feeling that’s not the way to do it,” said Tom Di Galloma, head of fixed income trading at Curvature Securities.

The expected increase in long-term debt is not the only factor pushing yields higher. Trump’s policies are expected to boost growth and possibly inflation, both of which will lead to higher interest rates.

The Treasury often uses short-term debt sales as a kind of shock absorber that it can increase or decrease when it experiences large fluctuations in its borrowing needs. But in the long term, market watchers say it is unwise to rely too much on short-term debt, because that increases the risk of refinancing if market conditions change.

Outstanding Treasury debt rose to $36 trillion from $23 trillion in late 2019 as the government relies more on debt to finance spending and plug its budget deficit, which analysts expect will continue to worsen for the foreseeable future.

Treasuries now represent 22% of the debt, higher than the Treasury Borrowing Advisory Committee’s recommendation of 15% to 20%.

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