At $32 trillion, U.S. debt held by the public is now approaching 100% of GDP. Overall debt outstanding is about to top $40 trillion. The annual budget deficit is close to 6% of GDP, and has been 5.5% or above for six straight years. There's no sign of a deficit-reduction plan of any sort in the works.
Many of the more ambitious tariff-revenue estimates have been undermined by the Supreme Court's February ruling against the bulk of the measures, and more than $100 billion of rebates have been paid to affected U.S. firms.
Fed reforms proposed by new Chair Kevin Warsh have also thrown the central bank's role in debt pricing up in the air, with some investors assuming Warsh's "task forces" will produce plans for a further $1 trillion reduction, or more, in the Fed's still-huge, near-$7 trillion balance sheet of bond holdings. Other changes could bring nuanced shifts in the Fed's inflation target and communications.
Then there's the huge surge in U.S. corporate borrowing this year, competing for top-rated investment funds. It has been driven by an estimated $250 billion in long-dated bond offerings from AI hyperscalers, a tally that could double next year as AI capital spending booms.
If there is a strategy at Treasury, it's not about deficit reduction and seems to hinge on what markets call "Operation Twist" — reducing long-term debt by loading ever more of the expanding new debt into bills and short maturities, while praying the Fed eventually cuts rates to cheapen debt-servicing costs.
Long-bond buybacks fit with that, but many banks question how long Treasury can keep loading ever more new debt into paper maturing in 12 months or less. Already, some 22% of the Treasury market is in bills — up 6 percentage points in less than a year and three times the share of 10 years ago.
Even though Treasury's refunding pledge earlier this month was not to increase coupon sizes for "several quarters," HSBC strategists think that promise may be broken as soon as May 2027. Delaying bigger coupon sales any longer may risk a more abrupt and disruptive "terming out" of the debt down the line.
What's more, there's the currency aspect for overseas investors. The dollar .DXY fell sharply on Wednesday in tandem with the retreat in long yields. But this may be a warning to foreign Treasury holders that their total returns will likely be capped one way or another.
"If the market price of Treasuries is not 'allowed' to adjust down, the foreign exchange price of Treasuries owned by foreign investors has to adjust via a weakening in the dollar," reckons Deutsche Bank strategist George Saravelos.
Maybe reining in restive bonds through the midterms is the extent of everyone's horizon in Washington right now. But there are another two years of this administration afterward, and it could get trickier and trickier.
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