Trump and Baesen Specific Adjustment: After the interest rate decrease, the US issues more long-term bonds.

Author: Long Yue, Wall Street Journal

U.S. President Trump and Treasury Secretary Mnuchin are in agreement, claiming they will wait to consider issuing long-term government bonds until interest rates fall.

According to the latest reports, the Trump administration is deviating from the "routine and predictable" debt issuance principles that the Treasury has followed for decades, opting instead for a more speculative "timing" strategy.

"What I want to do is issue very short-term bonds, wait until this guy (Powell) is out of office, interest rates drop significantly, and then switch to long-term." Trump has previously stated that he prefers to only issue short-term bonds with maturities of six to nine months before Federal Reserve Chairman Powell leaves office next year and interest rates drop significantly.

This time, even Treasury Secretary Mnuchin, who claims to be the "Chief Bond Salesman of the United States," has personally stepped in to discuss that he will consider increasing the issuance of long-term government bonds only after interest rates have fallen. He had previously hinted that increasing the issuance of long-term bonds was necessary before taking office in the Trump administration.

Analysis suggests that for decades, the U.S. Treasury's debt management has been known for its "tediousness," which is an intentional design. Its officials have consistently emphasized that their goal is not to achieve the best interest rates by predicting the market, as they are concerned that such attempts could create uncertainty and speculative behavior, ultimately driving up borrowing costs. However, the new rhetoric from the Trump administration is breaking this norm. The public discussion of "timing issuance" may expose the government's borrowing decisions to higher risks. If the market perceives that the government's issuance plans are no longer predictable, it may demand a higher risk premium, thereby counterproductively raising interest rates.

This potential strategic shift comes as the U.S. government faces an annual fiscal deficit of about $2 trillion. The market is closely watching the U.S. quarterly refinancing statement to be released this Wednesday for clues on whether the Trump administration will formally translate its public statements into policy.

Deadline Choices under Huge Deficits

The reason why borrowing has become an increasingly important issue is that the scale of borrowing by the U.S. government is unprecedented.

The U.S. federal budget deficit currently reaches about $2 trillion annually, while the total national debt is nearing $30 trillion. In filling the funding gap, the government needs to make trade-offs between debts of different maturities. Short-term borrowing is usually cheaper, but it makes financing costs more volatile, and once inflation rebounds and the Federal Reserve is forced to raise interest rates, there is a risk of a surge in costs.

In contrast, the cost of long-term borrowing is more predictable, but usually requires a higher initial interest rate. The Trump administration's current preference for short-term debt is a choice made in this context.

The official stance of the U.S. Treasury Department remains cautious

Despite the frequent "timing" signals released by the president and the treasury secretary, the official stance of the Treasury Department remains cautious.

Michael Faulkender, the Deputy Secretary of the U.S. Treasury, stated in a written statement that the Treasury remains committed to issuing bonds in a "regular and predictable" manner, while considering the views of market participants. He stated:

It is dishonest to imply that the current government has deviated from long-standing debt management practices when the scale of the Treasury's auctions and market guidance has not changed since the previous administration.

Despite the official attempts to downplay the strategic shift, most analysts expect that the Treasury may maintain the current pace of medium- and long-term government bond issuance in the upcoming quarterly refinancing statement. Analysts believe that to meet the government's increasing financing needs, this plan may soon require the issuance of additional short-term Treasury bills to supplement funding, which is consistent with the short-term strategy favored by Trump.