These deficit figures require ever larger issues of Treasury securities. This raises issues of absorption at a time when new challenges are emerging, such as the higher level of interest rates, which means an increase in the stabilising government balance (see: Stabilising public debt: primary budget surpluses will be needed in many countries). The 2021–2023 inflationary shock also brought the Fed's quantitative easing (QE) to an end, thereby increasing the quantity of bond issues that have to be absorbed by parties other than the central bank. Inflation may initially lead to a reduction in the ratio of debt-to-GDP through a nominal effect (reduction in the real value of the debt). However, if it persists once the shock has dissipated, the effect fades as the inflation premium demanded by investors to bear the risk of losses in real terms rises, thus increasing bond yields. In this respect, the 10-year breakeven inflation rate remains relatively contained (2.4% in August 2025) but significantly higher than in 2015–2019 (average of 1.8%).
THE GROWING WEIGHT OF THE INTEREST BURDEN COMPARED WITH DISCRETIONARY
SPENDING (MARCH 2025 FORECASTS)Another reflection of the magnitude of the fiscal challenge is the weight of debt servicing, (already the highest since 1991), which will exceed weight of the two components of discretionary spending (defence and non-defence, Chart 8) this year. Some political factors are leading the United States to wait for bond yields to fall. The current administration is unlikely to raise taxes (despite a low level of revenue, standing at 17.1% of GDP), or reduce the defence budget (3.0% of GDP). Although the OBBA will reduce Medicaid spending, it will be harder to reduce other mandatory spending (including pensions). Furthermore, these are set to rise in the coming years as the population ages. In these conditions, the existing room for manoeuvre appears to be restricted to discretionary spending (excluding defence, i.e. 3.3% of GDP), which is reviewed annually by Congress. Moreover, these deficit levels imply that there will be less leeway should there be a recession. Furthermore, the upward trajectory of the debt-to-GDP ratio could create a vicious circle for bond yields. It is estimated that a 1 percentage point rise in the debt-to-GDP ratio would cause yields to rise by 3-4 bps (Rachel and Summers, 2019), which would in turn imply a rise in indebtedness.
Finally, the high level of political polarisation in the United States does not facilitate a bipartisan approach to the issue, which seems to be a prerequisite (see “Managing supply without fuelling tensions?” below). To make matters worse, this polarisation and the federal government's fiscal course give rise to the frequent risks of a shutdown and of the debt ceiling being reached, both of which are the subject of intense bargaining. So far, these conflicts have been resolved fairly quickly. The debt ceiling is certainly an artificial limit to the debt level, but it is better to avoid experiencing its practical consequences.
Managing supply without fuelling tensions?
More than half of the outstanding federal debt held by the public will have to be refinanced by the end of 2028 (Chart9). In this effort, the US Treasury can manage the match between supply and demand by playing with different maturities (liability management). By issuing more short-term bonds, it can meet investors' liquidity needs while avoiding locking in part of its debt at a long-term interest rate that is deemed too high. This strategy was adopted in response to the sharp post-pandemic rise in interest rates, with the average maturity of federal debt falling from 75 to 72 months between May 2023 and June 2025 (Chart 8). However, this solution cuts both ways, as it exposes the issuer more to interest rate risk. The practice, initiated under the previous administration, has been extended by Scott Bessent, the current Treasury Secretary. Given the current high level of 10-year yields, he has indefinitely postponed his plans to increase issues of long bonds (terming out). In a low-interest-rate environment, the strategy of lengthening the average maturity would have the advantage of stabilising the management of the federal debt and its servicing, which is positive from the point of view of preserving Treasuries' safe-haven status.
MARKETABLE DEBT REACHING MATURITY
Another possibility, which the US Treasury is gradually exploring, is to operate directly on the secondary market. Treasury buyback programmes enable it to withdraw the least traded securities (the oldest, off-the-run) from the market at the same time as it auctions new securities (on-the-run). The aim is to reduce the stock of less liquid securities that could be sold to primary dealers in a race for liquidity, and even to reduce the cost of debt. The pace and scale of buybacks has increased sharply from 2024 onwards, whereas previously the practice had been marginal (Chart 11). This happened in two stages: first, from Q2 2024, under Janet Yellen, who put forward the traditional explanations of liquidity and cash management (Yellen, 2024), and then under the new administration. Since 20 January 2025, more than USD 122 bn of securities have been repurchased in this way (compared with USD 88 bn between May 2024 and that date, Chart 11), including two historic daily records of USD 10 bn in June. At this stage, however, the scale of buybacks remains modest in relation to the size of the market.
Finally, the most effective way for the US administration to reinforce the stability of the Treasuries market would be to contain its supply of debt securities, in other words, to undertake fiscal consolidation. This would increase the attractiveness of US bonds and address concerns about the sustainability of US debt. The most recent example of successful massive consolidation dates back to the Clinton administration (D, 1993–2001). The recommendations of a commission, made up of members of Congress from the two dominant parties and representatives of the public and private sectors, contributed to bipartisan acceptance of the need to reduce the deficit. In 1997, the Balanced Budget Act was passed by a Congress controlled by the opposing party with an overwhelming bipartisan consensus. Subsequently, the US federal budget was in surplus for four consecutive years (1998–2001). It should be noted, however, that this occurred in a climate that was conducive to accelerating growth, rising tax revenues as a percentage of GDP and bipartisan compromise[2]. The combination of these three factors seems unlikely today, unless a tipping point was reached, where the cards could be dealt out again.
