By Karen Brattle
NEW YORK (Reuters) – Longer-dated U.S. Treasury yields rose to multi-month highs, outpacing increases in shorter-dated yields, with some disparities reflecting expectations that the incoming Trump administration will trust the The current focus on will need to change. More on short-term loans, traders say.
President Joe Biden’s Treasury Secretary Janet Yellen has increased sales of Treasury bills, maturing in a year or less, which has seen strong demand from money market investors.
But it has pushed the bills above recommended levels for the overall debt balance, a process that will likely need to be addressed by President-elect Donald Trump’s nominee for Treasury chief Scott Besant.
“The market is building a longer-term premium to the financial position, deficits, and potentially higher issuance at the longer end of the curve,” said Dan Mulholland, head of rates, — at Cruise & Associates. Trade and Sales.
Ten-year yields were lower than two-year notes around September and have been rising at a faster pace since June. The ten-year yield hit 4.73% on Wednesday, the highest since April, while the two-year yield held relatively steady at 4.27%.
Abundant supply of short-term debt was a factor in keeping the US Treasury yield curve inverted longer than normal, from July 2022 to September, which is now being inverted, traders say.
“It inverted the yield curve, and now I think there’s a sense that that’s not the way to do it,” said Tom De Galoma, head of fixed income trading at Curvature Securities.
A possible rise in long-term debt isn’t the only factor driving yields higher. Trump’s policies are expected to boost growth and potentially inflation, both of which would lead to higher interest rates.
The Treasury often uses short-term debt sales as a form of shock that it can raise or lower when it faces major changes in its borrowing needs. But long-term, market observers say it is unwise to rely heavily on short-term debt, as it increases refinancing risks if market conditions change.
Outstanding Treasury debt rose to $36 trillion from $23 trillion at the end of 2019 as the government relies more on debt to finance spending and meet its budget deficit, which analysts expect will remain flat for the foreseeable future. It will continue to get worse.
Treasury bills now account for 22% of debt, above the 15-20% recommendation by the Treasury Borrowing Advisory Committee.
