Expectations of Federal Reserve rate hikes are heating up, short-end U.S. Treasury yields are surging sharply, and Bessent faces a dilemma in debt management.
BlockBeats news, September 28 — Bloomberg Opinion columnist Jonathan Levin wrote that as the Federal Reserve restarts rate hikes, the U.S. Treasury market is shifting from earlier concerns about fiscal deficits and long-term debt supply toward trading expectations that rates will remain higher for longer. Since Fed Chair Warsh delivered a hawkish speech at Jackson Hole in late August, the real yields on 2-year and 5-year U.S. inflation-protected Treasuries have risen by about 57 basis points and 64 basis points, respectively, indicating that the recent rise in U.S. Treasury yields mainly reflects higher real rate expectations rather than a significant deterioration in inflation expectations.
Since September, the 2-year U.S. Treasury yield has risen by a cumulative roughly 55 basis points, while the spread between 10-year and 2-year Treasury yields briefly narrowed to about 17 basis points, the lowest level since early 2025. The market currently expects about a two-thirds probability that the Fed will raise rates again in October and has already priced in at least the equivalent of three 25-basis-point hikes over the next year.
At the same time, the Fed's continued rate hikes are also putting new pressure on U.S. Treasury Secretary Bessent's debt management. The U.S. Treasury Department had previously relied more heavily on short-term Treasury bill financing and expanded long-term Treasury buybacks to improve liquidity in the long-term bond market.
Levin believes this approach helps delay locking in higher long-term financing costs, but if the Fed continues to raise rates, the frequent rolling over of short-term debt will also push up government interest expenses. The Treasury Department therefore faces a trade-off between extending debt maturity in a high-rate environment and continuing to rely on short-term financing. The next quarterly refunding schedule will be announced on November 4.
