Janet Yellen’s risky debt-management business

livemint.com:

The Biden administration’s profligate spending—driving unprecedented trillion-dollar deficits during a full-employment, peacetime economy—has naturally required an increase in borrowing. But the size of Treasury issuance is only one aspect of U.S. borrowing.

The way the U.S. borrows is equally important to market assessments of American financial credibility. Traditionally, the U.S.

funds itself mostly with medium-term notes and long-term bonds. The Treasury Department generally refrains from trying to time the market and has instead sought to issue notes and bonds with a stable and predictable rhythm. This approach helps provide orderly benchmark interest rates and lets markets plan for absorbing the significant interest-rate risk that comes with longer-term Treasury securities.

This reinforces market stability. Short-term debt in the form of Treasury bills has generally made up between 15% and 20% of the total outstanding stock of debt. During recessionary periods, the proportion of bills generally increases as the deficit increases, both because the creation of safer assets helps meet a market need and because of the desire to maintain stable and predictable note and bond issuance.

That’s why bills went from approximately 15% of outstanding debt in February 2020 to 25% by May 2020. The government was trying to fund its Covid response during a downturn. As the economy recovered, debt management returned to traditional practice, with bills falling to less than 20% of outstanding debt by July 2021, even amid the blowout spending of the American Rescue Plan.