As U.S. Debt Grows, Short-Term Bonds Could Be a Time Bomb for the Market

The value of U.S. Treasury bonds maturing in 2025 has reached $3 trillion. The high proportion of short-term bonds is potentially destabilizing in the bond market.

CNBC reported on Wednesday that the U.S. Treasury issued $26.7 trillion in bonds from January to November last year, a 28.5% increase from 2023. The problem is that many newly issued treasury bonds comprised short-term bonds.

Historically, short-term bonds typically comprise about 20% of total bond issuance. However, the U.S. Treasury increased the proportion of short-term bond issuance to navigate debt ceiling negotiations and quickly raise funds for fiscal management.

Governments usually issue long-term bonds to cover budget deficits, spreading debt repayment over several years.

 However, economists, including NYU professor Nouriel Roubini and Republicans, criticize Janet Yellen. They argue that the Biden administration issued too many short-term bonds with relatively low interest rates to stimulate the economy before the presidential election. 

CNBC warned that if the U.S. government refinanced maturing short-term bonds into medium and long-term bonds, it could unexpectedly impact the bond market.

With the U.S. fiscal deficit already reaching $2 trillion and additional treasury bond issuance putting a heavy burden on the bond market, converting short-term to long-term bonds could further exacerbate these pressures.

Tom Tzitzouris, head of fixed-income research at Strategas Research Partners, explained to CNBC that if the U.S. government persists in incurring deficits amounting to trillions of dollars post-2025, the cumulative deficit will ultimately surpass short-term bond issuance. He recommended that short-term bonds be progressively converted into bonds with 5-10-year maturities, indicating that the fiscal deficit will pose a more significant concern for the bond market this year than the short-term bond market.

Meanwhile, long-term treasury yields have risen since the Federal Reserve took a big interest cut by 0.50% in September. The yield on the 10-year U.S. Treasury was 4.57% as of December 31, 2024, up about 1% from the September low of 3.6%.