By Karen Brettell
NEW YORK (Reuters) – Long-term U.S. Treasury yields have risen to multi-month highs, outpacing the rise in short-term yields, and part of the disparity reflects anticipation that the incoming Trump administration will need to change the current approach of relying more on short-term debt, traders say.
President Joe Biden’s Treasury Secretary Janet Yellen has increased sales of Treasury bills, debt maturing in a year or less, which has seen strong demand from money market investors.
But that has pushed the portion of the bills above recommended levels for total outstanding debt, a process that will likely have to be addressed by President-elect Donald Trump’s nominee for Treasury chief, Scott Bessent.
“The market is generating more term premiums on the long end to account for the fiscal situation, the deficit and potentially a lot more issuance on the long end of the curve as they unwind Yellen policy,” Dan Mulholland said. , head guy. – trade and sales at Crews & Associates.
Ten-year bond yields were below those on two-year bonds until around September and have been rising at a faster pace since June. Ten-year yields hit 4.73% on Wednesday, the highest level since April, while two-year yields have remained relatively stable at 4.27%.
Traders say the abundant supply of short-term debt was a factor that kept the US Treasury yield curve inverted for longer than usual, from around July 2022 until September, which is now inverting.
“That kept the yield curve inverted, and now I think there’s a feeling 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 driving up yields. Trump’s policies are expected to boost growth and potentially inflation, leading to higher interest rates.
The Treasury often uses short-term debt sales as a kind of buffer that it can increase or decrease when it faces large swings in its borrowing needs. But longer term, market watchers say it’s unwise to rely too much on short-term debt, as it increases refinancing risks if market conditions change.
Outstanding Treasury debt has risen to $36 trillion from $23 trillion at the end of 2019, as the government relies more on debt to finance spending and plug its budget deficit, which analysts expect to continue worsening in the foreseeable future.
Treasury bills now represent 22% of the debt, above the Treasury Lending Advisory Committee’s recommendation of 15-20%.