When Will the “Bill” Come Due?

A couple of weeks ago, we wrote about how the deficit had come back into focus for the U.S. financial markets. Now that we have the results of Election Day essentially in the books, “a red sweep,” we thought it would be a good idea to revisit an issue that will no doubt continue to garner investors’ attention.

While the Republicans flipped the Senate by a noticeable margin, the majority is still not necessarily “Manchin-proof,” and the advantage in the House of Representatives looks like it will be razor-thin when all the votes are finally tallied. As a result, in our opinion, this legislative scenario may not necessarily give way to bold and/or sweeping new initiatives. However, renewing the 2017 Tax Cuts and Jobs Act (TCJA) appears to be relatively “low-hanging fruit” and the most likely candidate to be addressed in 2025. The restoration of the state and local tax (SALT) deduction also appears to be on the list of “things to do” that could be accomplished in the next legislative year.

As a result, a baseline budget deficit of roughly $2 trillion, which is currently the case, is the starting off point as we look ahead. An important question will continue to be: how is this shortfall going to be funded? Yes, Treasury supply is going to remain highly elevated, but what will the mix of offerings ultimately consist of to get the job done?

With red ink in the multi-trillion-dollar stratosphere, the nation’s debt managers will no doubt have to continue to utilize their whole arsenal of marketable securities. That means T-Bills, T-Notes and bonds, floating rate notes (FRNs) and Treasury Inflation-Protected Securities (TIPS).

Oftentimes, the Treasury uses T-Bills as the flexible component for funding. Indeed, the money and bond markets prefer to have a more regular cadence for fixed coupon offerings, which helps to reduce uncertainty. T-Bills come not only in their own regular calendar of auctions, such as the 3-, 6- and 12-month maturities, to name a few, but the debt managers also issue cash management bills to help bridge any financing gaps that pop up in a given quarter.

This most recent bout of supply needs has seen a shift in the underlying makeup of marketable public debt outstanding. While the debt managers have increased the sizes of fixed coupons and floating rate notes over the last year or so, T-Bill issuance has taken on an increasing amount of the load. To provide perspective, as of October 2024, the number of T-Bills outstanding as a percentage of total marketable debt outstanding rose to a little more than 22%, an increase of nearly five full percentage points from the COVID-19 timeframe of October 2021. Just a short five years ago, T-Bills made up “only” about 15% of the total.

Some market participants would argue that the Treasury should have issued more longer-dated debt to spread out the burden and timeframe for when Treasury securities would need to be refinanced. Treasury Secretary nominee Scott Bessent has previously stated that the Yellen-led Treasury had over-utilized T-Bills to meet the U.S. government’s financing needs, and there has been some conjecture that perhaps some shifts in the issuance mix could be forthcoming in the new Trump administration.

It is fair to reason that a shift in the burden to maturities further out on the curve could create the type of uncertainty in fixed coupon issuance that has been typically avoided, if at all possible. The bottom line is that it’s too early to draw any conclusions on this, but the Treasury market will have something else to watch in 2025.