A group of Wall Street bankers, the Treasury Borrowing Advisory Committee (TBAC), has warned the U.S. Treasury of a projected $1.45 trillion funding shortfall for fiscal years 2027-2028. This comes as the government faces a roughly $2 trillion annual deficit. Treasury Secretary Scott Bessent is financing this deficit by heavily relying on short-dated IOUs, known as T-bills, which offer cheaper rates, rather than longer-dated notes and bonds. While this strategy lowers reported borrowing costs, it exposes the government to greater risks from inflation and rising interest rates.
This approach, which was also utilized by Bessent's predecessor Janet Yellen, has led to a significant increase in interest costs, adding $120 billion to Treasury outlays this year. The government's annual spending on interest alone now exceeds $1 trillion, surpassing the national defense budget. This situation raises alarms among experts like Jon Hilsenrath, a veteran Federal Reserve watcher, who believes that potential cracks in the financial system over the next few years could emerge from Treasury debt, echoing the 2008 mortgage crisis.
The growing federal debt, which has more than doubled since 2007 to $39 trillion, or 125% of GDP, is a major concern. Federal Reserve Chair Jerome Powell has expressed worry about the unsustainable growth of the national debt, which is expanding significantly faster than the economy. Experts like Andrew Metrick of Yale's School of Management warn that if America's debt continues to increase, investors might eventually question the safe haven status of the dollar and Treasury bonds, potentially triggering a crisis for which the financial system is unprepared.
Separately, the financial system is also grappling with the rapid expansion of AI-related borrowing. Big Tech companies, particularly hyperscalers like Alphabet, Amazon, Meta, Microsoft, and Oracle, are expected to dominate the US investment-grade corporate bond market, potentially accounting for half of the top 10 borrowers by 2030. Morgan Stanley estimates that AI-related corporate borrowing could reach $400 billion in 2026, a significant increase from $44 billion in 2024. This surge in AI-related debt has raised concerns about a potential bubble, increased correlation between corporate bonds and the tech-dominated stock market, and higher borrowing costs for highly indebted companies, as seen with Oracle's credit spread jump after an $18 billion bond issuance.
