BlockBeats news: On September 28, Bloomberg Opinion columnist Jonathan Levin wrote that, as the Federal Reserve resumes rate hikes, the U.S. Treasury market is shifting from prior concerns about fiscal deficits and long-term debt supply to pricing in expectations of higher interest rates persisting for longer. Since Fed Chair Powell’s hawkish speech at Jackson Hole at the end of August, the real yields on U.S. 2-year and 5-year TIPS have risen by approximately 57 and 64 basis points, respectively, indicating that the recent rise in Treasury yields primarily reflects higher real rate expectations rather than a significant deterioration in inflation expectations.
Since September, the yield on U.S. 2-year Treasury bonds has risen by approximately 55 basis points, and the spread between the 10-year and 2-year Treasury yields narrowed to around 17 basis points, the lowest level since early 2025. Markets currently estimate a two-thirds probability of another Fed rate hike in October, and have already priced in at least three 25-basis-point hikes over the next year.
Meanwhile, the Federal Reserve’s continued interest rate hikes have placed new pressure on U.S. Treasury Secretary Bentsen’s debt management. Previously, the U.S. Treasury relied heavily on short-term Treasury bills for financing and expanded the scale of long-term Treasury buybacks to improve liquidity in the long-term bond market.
Levin believes that this approach helps defer locking in higher long-term financing costs, but if the Federal Reserve continues to raise rates, frequent rollovers of short-term debt will also increase government interest expenditures. The Treasury therefore faces a trade-off between extending the maturity of debt and continuing to rely on short-term financing in a high-interest-rate environment; the next quarterly refinancing schedule will be announced on November 4.