It’s interesting to see how the U.S. treasury is financing the budget deficit. You would think that the treasurer of the biggest economy in the world, would use a combination of Bills, notes and bonds, in the same proportions, to avoid dislocations in the market, specially when treasuries are considered precious collateral for Repo operations. But the reality is that short term treasury bills have been dominating the gross issuance for a while, as you can see in the green bars of the chart below. As rates went up starting 2022, households and corporations abandoned bank deposits to pile on bills looking for that 5.25% return. The long term treasury bonds buyer of last resort, the Fed, is still downsizing its balance sheet (QT), and the big foreign creditors (China and Japan) are also dumping long term bonds due to a combination of lack of trust and high FX hedging costs, among other factors. Now that the Fed is supposed to start lowering rates, making bills less attractive, who will finance the deficit and how? Will Yellen be able to issue long term bonds? What happens to the yield curve if she does indeed tap the long end?
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