U.S. Treasury Yields Surge to Multi-Month Highs

By Karen Brettell

NEW YORK (Reuters) – Longer-term U.S. Treasury yields have surged to multi-month highs, outpacing shorter-dated yields. This disparity reflects anticipations that the incoming Trump administration will shift focus from short-term debt.

President Joe Biden’s Treasury Secretary Janet Yellen has increased sales of Treasury bills (debt maturing in one year or less), which are in high demand among money market investors. However, this has raised the portion of bills above recommended levels, a situation likely needing attention from President-elect Donald Trump’s nominee for Treasury chief, Scott Bessent.

Dan Mulholland, head of rates – trading and sales at Crews & Associates, noted, “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.”

As of Wednesday, ten-year yields reached 4.73%, their highest since April, while two-year yields remained steady at 4.27%. Traders attribute the prolonged inversion of the U.S. Treasury yield curve, from July 2022 to September, to an abundant supply of short-term debt.

Tom di Galoma, head of fixed income trading at Curvature Securities, remarked, “I think there’s a feeling that that’s not the way to do it.”

An anticipated rise in longer-dated debt will not solely drive yields higher; Trump’s policies are also projected to stimulate growth and inflation, further increasing interest rates.

Traditionally, the Treasury uses short-term debt as a buffer to adjust for large swings in borrowing needs. However, relying too heavily on short-term debt could increase refinancing risks, according to market observers.

Outstanding Treasury debt has surged to $36 trillion from $23 trillion in late 2019, driven by increased reliance on debt for financing spending and addressing the budget deficit, which analysts foresee worsening.

Currently, Treasury bills constitute 22% of debt, surpassing the 15-20% recommended range by the Treasury Borrowing Advisory Committee. They peaked at 25% in 2020 due to COVID-related spending but dropped to around 15% in 2022 before rising again.

While immediate increases in longer-dated debt auctions are unlikely, market participants are preparing for this eventuality. Will Compernolle, macro strategist at FHN Financial, stated, “Trump’s Treasury Secretary is not going to cause disruption in the market by suddenly changing the auction sizes, but in late April or early May, we might see announcements for higher coupon auction sizes.”

He added that increases in longer-dated debt may begin in the summer.