The U.S. Treasury has substantially increased its reliance on short-term Treasury bills to finance the national debt, which recently hit a record $40 trillion, and cover a projected annual budget deficit of $2 trillion. About 85% of debt issuance over the past few years has been in Treasury bills maturing within a year, with 20% of outstanding federal debt coming due in the next four months and 33% within a year. This strategy helps keep interest costs down in the short term, as yields on short-term securities are generally lower than those on longer-term bonds. For instance, the three-month bill yielded around 3.8% while the 10-year Treasury yield was about 4.6% and the 30-year bond exceeded 5% at the time of reporting.
This approach, however, exposes the government to significant refinancing risk if interest rates rise. While the Treasury states that over 75% of marketable debt is fixed-rate with maturities of two years or longer, the heavy use of bills shortens the average maturity of the debt and necessitates more frequent refinancing. Analysts like Ariane Curtis from Capital Economics warn that a sharp rise in short-dated yields, potentially due to the Federal Reserve hiking rates more than expected, poses the biggest risk to the debt burden. Interest costs on the national debt already exceed $1 trillion annually, surpassing U.S. national defense spending.
The Treasury Borrowing Advisory Committee (TBAC) prefers bill issuance to remain between 15% and 20% of outstanding marketable debt, but bills currently constitute 22% and could reach nearly 25% by fiscal year 2027 if current patterns continue. Money market funds are the primary buyers of these bills, absorbing much of the increased supply, with net T-bill issuance in July alone reaching approximately $270 billion. However, money market funds reduced their T-bill holdings by $365 billion in the first half of 2026, raising concerns about their capacity to absorb future supply.
Critics, including former Wall Street Journal Federal Reserve watcher Jon Hilsenrath, express concern about a potential collision between the Treasury's reliance on shorter-term debt and the Fed's plans to shrink its balance sheet, particularly its long-term Treasury holdings. This could lead to a glut of long-term bonds with fewer buyers, pushing yields higher. Experts like Zach Griffiths from CreditSights caution that if bills constitute too high a percentage of marketable debt during normal times, the Treasury may lack the capacity to issue more short-term debt quickly during a crisis. The current strategy is a trade-off, lowering immediate costs but increasing vulnerability to future interest rate fluctuations and potentially limiting crisis-response options.
