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Author: Long Yue, Wall Street News
U.S. President Trump and Treasury Secretary Becent are singing, claiming that they will wait for interest rates to drop before considering issuing additional long-term Treasury bonds.
The latest report said that the Trump administration is deviating from the “regular, predictable” debt issuance principles pursued by the Treasury Department for decades and instead adopting a more speculative “timed” strategy.
“What I have to do is issue very short-term bonds, and wait until this guy (Powell) steps down, interest rates drop sharply, and then move to the long-term.” Trump has previously publicly stated that he tends to issue short-term bonds with a maturity of six to nine months before Fed Chairman Powell leaves office next year and interest rates drop sharply.
This time, even Treasury Secretary Bescent, who calls himself the “Chief Bond Salesman of the United States”, came to the scene and talked about waiting for the interest rate to drop before considering issuing additional long-term Treasury bonds.He had previously suggested that increasing the issuance of long-term bonds is necessary before taking office as Trump administration.
Analysts believe that for decades, the US Treasury’s debt management has been known for being “boring”, which is a deliberate design.Its official has always emphasized that its goal is not to obtain the best interest rate by predicting the market, because of fear that such attempts will trigger uncertainty and speculation, which will ultimately push up borrowing costs.However, new remarks from the Trump administration are breaking this routine.Public discussion of “time issuance” may put government lending decisions at higher risk.If the market believes that the government’s issuance plan is no longer predictable, it may require a higher risk premium, which will counterproductively raise interest rates.
This potential strategic shift comes as the U.S. government faces a fiscal deficit of about $2 trillion a year.Markets are closely watching the U.S. quarterly refinancing statement to be released on Wednesday to find clues about whether the Trump administration will formally translate its public remarks into policy.
Duration selection under huge deficits
How to borrow has become an increasingly important issue because the US government’s borrowing scale is unprecedented.
The U.S. federal budget deficit is currently as high as about $2 trillion per year, while the total Treasury bonds are close to $30 trillion.When filling the funding gap, the government needs to make a trade-off between debts of different maturities.Short-term lending is usually cheaper, but makes financing costs more prone to fluctuation. Once inflation rebounds and the Fed is forced to raise interest rates, it will face the risk of a surge in expenses.
Long-term borrowing costs are more predictable, by contrast, but often require higher initial interest rates.The Trump administration’s current preference for short-term debt is the choice in this context.
The Treasury Department is cautious in its official caliber
Although the president and the Treasury Secretary frequently send out “timing” signals, the official caliber of the Ministry of Finance remains cautious.
U.S. Treasury Deputy Secretary Michael Faulkender said in a written statement that the Treasury remains committed to issuing bonds in a “regular and predictable” manner and refer to the opinions of market participants.He said:
It is dishonest to suggest that the current administration has deviated from long-term debt management practices, amid the Treasury auction scale and market guidance that has not changed since the previous administration.
Despite official attempts to downplay the shift in strategy, most analysts expect the Treasury Ministry to maintain its current medium- and long-term Treasury bond issuance rhythm in the upcoming quarterly refinancing statement.Analysts believe that to meet the government’s growing financing needs, this plan will likely soon need to supplement funds through additional short-term treasury bonds, which is in fact consistent with the short-term strategy Trump favors.
