💡 Bessent's Treasury Dilemma

Issue 155

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Today’s Bullets:

• The Shift and Why

• The Immediate Problem

• The Long Term Problem

• The Solution

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Inspirational Tweet:

Newly appointed US Treasury Secretary, Scott Bessent has been extremely critical of former US Treasury Secretary Janet Yellen over her handling of the US Debt.

Specifically, how she’s been issuing so many T-Bills lately. She should have termed out, Bessent said.

But what the heck does ‘term out’ mean, what’s the problem with T-Bills?

Well, if the bond talk sounds confusing, don’t worry, it’s actually pretty simple and we’re going to walk through this important dilemma that the US Treasury now faces.

And we will do it nice and easy, as always.

So, pour yourself a big cup of your favorite coffee, and settle into a comfortable seat for a peek behind the Treasury curtain with this Sunday’s Informationist.

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🧐 The Shift and Why

What exactly has been going on at the Treasury and what are we talking about here?

Put simply, the Janet Yellen and the Treasury have been relying heavily on the issuance of short term debt in order to help finance the government, its deficits.

And many of these T-Bills were really really really short term maturities.

Like just a few weeks or even days.

And so now, if we look at the entire spectrum of US debt that is out there, T-Bills make up a significant portion of the total.

You can see how it has shifted from being just 10% to over 20% of the total now.

Why did she do it, and why is Bessent being so critical, all but calling it a policy error.

In essence, Yellen did this because the Fed raised interest rates at a breakneck speed during her term, all while the US government continued to run massive deficits that required the Treasury to issue more and more debt to finance.

So, she kept maturities short, expecting to refinance them when the Fed lowers rates again. The last thing she wanted to do was lock in high rates on longer maturing debt.

But Bessent contends that Yellen should have leaned much harder on the long end of the curve well before all this happened.

In other words, she should have taken advantage of the rock-bottom rates at the beginning of her term and issued more and more longer dated maturities (like the US 10-year Treasury, the global benchmark security).

She should have termed-out the debt.

I would have to agree with this assessment.

Some may say, how would she have known that the rates were going to skyrocket?

To that, one may say, considering Yellen was the Chairman of the Fed from 2104 to 2018, she would know that when the Fed printed $5T f*king dollars and flooded the financial system with liquidity that would cause asset and consumer inflation, well…

She should have known damn well that she needed to get ahead of this.

And once again, I would have to agree with that sentiment, too.

By now you may be saying, so what’s the problem? Why does it matter that the US has a bunch of short-term maturities instead of long-term bonds now?

Let’s talk some Treasury turkey, shall we?

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😬 The Immediate Problem

When you issue a bunch of short-term debt, that means you will soon need to refinance all of that debt.

Because the US government operates in a deficit. And this means it doesn’t make enough money to pay off any of that debt. It spends far too much, so it has to simply borrow more to keep the charade going.

If this sounds like a Ponzi scheme to you, it should.

The classic definition of a Ponzi is when you have to find more and more people to borrow from in order to remain liquid and pay off old investors.

Except that’s not all. It actually gets worse.