What will Washington do next if US bond yields keep rising?
TLT•The US government faces an annual interest bill of about $1 trillion on more than $40 trillion of debt as long-term Treasury yields approach their highest levels in two decades. Options include more short-term borrowing, bond buybacks, spending cuts and, with Federal Reserve involvement, large-scale bond purchases or yield caps.
1. Options to manage borrowing costs
The Treasury is relying more on short-term bill issuance and making small buybacks of older debt to support market liquidity. More extensive steps could involve Federal Reserve purchases of long-term bonds or a cap on yields, but the article says these measures risk worsening inflation.
2. Two paths for the debt
Some economists argue that spending cuts are needed to address the debt burden. Historical examples cited in the article show debt-to-GDP falling through different combinations of inflation, growth, spending restraint and revenue increases. John Higgins of Capital Economics said current political constraints tilt risks toward an inflationary path that hurts bondholders.
