The recent surge in longer-term U.S. Treasury yields, outpacing shorter-dated yields, reflects market anticipation of a shift in the Treasury’s debt management strategy under the incoming Trump administration. This analysis by Hyperloop Capital Insights delves into the factors driving this change and its potential implications for investors.
Under the Biden administration, Treasury Secretary Janet Yellen focused on increasing sales of Treasury bills—debt maturing in one year or less. This strategy catered to strong demand from money market investors. However, it resulted in bill holdings exceeding recommended levels relative to overall outstanding debt. This imbalance is expected to be addressed by Scott Bessent, President-elect Trump’s nominee for Treasury chief.
Market experts believe that the current yield curve steepening reflects an unwinding of this short-term debt reliance. “The market is building more term premium into the long end to account for the fiscal situation, the deficit, and potentially a lot more issuance in the long end of the curve as they unwind the Yellen policy,” explains Dan Mulholland, head of rates – trading and sales at Crews & Associates.
The divergence in yields became evident around September, with 10-year yields rising faster than 2-year yields. Recently, 10-year yields reached a multi-month high of 4.73%, while 2-year yields remained relatively stable at 4.27%. This contrasts with the inverted yield curve observed from July 2022 to September, largely attributed to the oversupply of short-term debt. “That kept the yield curve inverted, and now I think there’s a feeling that that’s not the way to do it,” notes Tom di Galoma, head of fixed income trading at Curvature Securities.
Beyond the shift in debt issuance strategy, anticipated growth and inflation under Trump’s policies also contribute to rising yields. These factors exert upward pressure on interest rates across the board.
While short-term debt sales provide flexibility in managing borrowing needs, excessive reliance on them poses refinancing risks. The current national debt stands at a staggering $36 trillion, up from $23 trillion in late 2019, highlighting the government’s increasing dependence on borrowing. With Treasury bills currently accounting for 22% of outstanding debt, exceeding the recommended 15-20% range advised by the Treasury Borrowing Advisory Committee, a strategic adjustment is imminent.
In conclusion, the anticipated shift in the Treasury’s debt management approach under the Trump administration, coupled with expected economic growth and inflation, is driving the current steepening of the U.S. Treasury yield curve. This adjustment has significant implications for fixed-income investors and warrants close monitoring by Hyperloop Capital Insights. The transition away from short-term debt reliance towards a more balanced approach will likely reshape the yield curve landscape and influence investment strategies in the coming months.
