31 July 2023
The US Treasury is preparing for a significant increase in longer-term security issuance in response to a worsening budget deficit and surging interest rates. The public borrowing requirements are escalating due to the Fed’s rate hikes, which increase yields on government debt, thereby making it costlier. Concurrently, the Fed is reducing its Treasury holdings, which necessitates larger government sales to other buyers, potentially leading to more volatile auctions. An uptick in debt issuance doesn’t immediately mean lower prices and higher yields but increases the potential for short-term volatility, especially given the banks’ reduced market-making appetites. The combination of Fed rate hikes and inflation has spiked the cost of servicing US government debt by 25% in the fiscal year’s first nine months. This rapid growth in public borrowing only underscores the seriousness of the country’s financial situation.