Short-term and Medium- to Long-term Bond Refinancing Leads to Interest Rate Increase
Bond Market Burden Intensifies Amid Trump-driven High Interest Rate Outlook
A warning has been issued that the large proportion of short-term bonds among the $3 trillion (approximately 4,415 trillion KRW) of U.S. Treasury bonds maturing this year could exacerbate instability in the bond market. In a situation where prolonged high interest rates are expected due to 'Trumflation' (inflation caused by Trump's policies), there is speculation that if a flood of U.S. Treasury refinancing issuances occurs, Treasury yields could rise even further.
On the 1st (local time), U.S. CNBC cited data from the Securities Industry and Financial Markets Association (SIFMA) reporting that the U.S. Treasury issued a total of $2.67 trillion in Treasury bonds from January to November last year.
This represents a 28.5% increase compared to 2023, with a significant portion composed of short-term bonds. Short-term bonds are Treasury bonds with short maturities, mainly those with maturities of one year or less.
The U.S. Treasury typically aims to maintain the proportion of short-term bonds at around 20% of total Treasury issuance. However, due to controversies over raising the federal debt ceiling caused by expanding fiscal deficits and budget conflicts making rapid government operating funds urgent, the Treasury has significantly increased the issuance of short-term bonds in recent years. In particular, Janet Yellen, U.S. Treasury Secretary, issued a large volume of low-interest short-term bonds to stimulate the economy ahead of the 2024 presidential election, drawing criticism from economists such as 'Dr. Doom' Nouriel Roubini of New York University and the Republican Party. This is because it is generally customary to issue long-term bonds that can spread the debt repayment burden over several years when fiscal deficits occur.
In the market, concerns are raised that such a high proportion of short-term bonds amid an annual U.S. fiscal deficit of $2 trillion could cause turmoil in the bond market this year. If the Treasury refinances short-term bonds maturing by issuing medium- to long-term bonds, there is a high possibility that the bond market will be unable to absorb the flood of supply. This could lead to a sharp rise in bond yields.
With Donald Trump, the U.S. President-elect who will take office on the 20th, expected to raise tariffs, ban illegal immigration causing inflation, and implement large-scale tax cuts, the already anticipated prolonged high interest rates situation could be further fueled by the short-term bond issue, raising concerns about rising Treasury yields. The U.S. 10-year Treasury yield, a global bond yield benchmark, rose from around 3.9% in early January last year to 4.57% currently. Previously, the U.S. Federal Reserve (Fed) sharply reduced the expected number of rate cuts this year from four cuts of 0.25 percentage points each (total 1.0 percentage point) to two cuts (total 0.5 percentage points) due to rising inflation and a robust labor market.
Tom Chichuris, head of the bond division at Strategas Research Partners, analyzed, "If the U.S. federal government continues to run fiscal deficits exceeding $1 trillion annually after 2025, the accumulated deficit will eventually overwhelm the volume of short-term bond issuance. Short-term bonds need to be gradually converted into 5- to 10-year Treasury bonds, but this is causing greater concern in the bond market this year than the fiscal deficit itself."
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