On Sept. 28, Bloomberg Opinion columnist Jonathan Levin wrote that as the Federal Reserve resumes rate hikes, the U.S. Treasury market is moving away from earlier worries about fiscal deficits and long-term debt supply and toward pricing in interest rates staying high for longer.
Real yields and the front end moved higher
Since Fed Chair Warsh gave a hawkish speech at Jackson Hole in late August, real yields on 2-year and 5-year Treasury Inflation-Protected Securities have risen by about 57 basis points and 64 basis points, respectively. Levin said that points to a rise in real-rate expectations as the main driver of the recent increase in Treasury yields, rather than a meaningful worsening in inflation expectations.
Since September began, the 2-year U.S. Treasury yield has gained about 55 basis points. The spread between 10-year and 2-year Treasury yields also narrowed to around 17 basis points at one stage, the lowest level since early 2025.
Markets are pricing in more tightening
The market is now assigning roughly a two-thirds chance to another Fed rate hike in October. It has also priced in at least the equivalent of three 25-basis-point hikes over the next year.
Bessent faces a debt-management trade-off
Levin wrote that continued Fed tightening is putting fresh pressure on Treasury Secretary Bessent’s debt-management decisions. The U.S. Treasury had previously relied more heavily on short-term bill financing and expanded buybacks of longer-dated Treasuries to improve liquidity in the long-bond market.
According to Levin, that approach helps delay locking in higher long-term borrowing costs. But if the Fed keeps raising rates, the frequent rollover of short-term debt would also lift the government’s interest bill. That leaves the Treasury weighing whether to extend the maturity of its debt in a high-rate environment or continue leaning on short-term financing. The next quarterly refunding announcement is scheduled for Nov. 4.