USD Rates: Bill financing costs rise with Fed hikes – DBS

DBS Group Research economist Eugene Leow analyses how rapidly rising US Treasury yields are complicating financing for the US government as the Federal Reserve hikes rates. He highlights the growing reliance on short-term bills, now around a quarter of marketable debt, and warns that refinancing at higher front-end and 10-year yields could significantly increase interest costs for the US Treasury.

Fed hikes strain US bill financing

"Rapidly rising US Treasury yields is a problem for Treasury Secretary Bessent. The US’s fiscal issues are well known. Sticky and rising spending across Social Security and Medicare, declining corporate tax revenues and the hiccup over tariff collections."

"Beyond all these, there is also the USD 82bn increase in interest spending over the past year (interest payments make up about 4.6% of GDP) to contend with as debt gets refinanced at higher rates."

"The most direct implication of Fed hikes is that bills financing will not work as well."

"A 75bps jump in frontend financing costs (when all the bills roll over and assuming the Fed hold at 4.5%) would cause financing costs to balloon by around USD 54bn, all else equal."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)