The Treasury Department's effort to accelerate purchases of longer-term U.S. government debt may temporarily ease strains in the bond market but won't resolve the growing imbalance between record borrowing and investor demand, according to a senior JPMorgan analyst.
James Sullivan, JPMorgan's co-head of global fundamental research, said Friday that Treasury's buyback strategy could help manage borrowing costs in the short term but risks postponing a more fundamental problem as the U.S. national debt crosses $40 trillion and annual federal interest expenses approach $1 trillion.
"It's a little bit like paying your mortgage with your credit card," Sullivan told CNBC. "It can work for a while, but eventually the mismatch starts to become more obvious."
His warning came after Treasury Secretary Scott Bessent indicated the government could expand debt repurchases beyond the $4 billion per issue announced Wednesday. The Treasury is targeting longer-dated securities, particularly portions of the market where investor demand has weakened and yields have moved sharply higher.
Speaking to CNBC on Thursday, Bessent said Treasury intends to "make a market" in longer-term securities. "I would note that it could be more than the 4 billion per issue," he said.
The Treasury's intervention initially pushed yields lower, but the move proved short-lived as yields quickly rebounded. That reversal highlighted the difficulty policymakers face in attempting to influence a market increasingly focused on the volume of debt Washington must issue and the cost of servicing it.
Bessent acknowledged pressure on longer-term yields but argued that current market levels don't accurately reflect the strength of the U.S. economy. "Part of it is signaling here and to show that we believe that the yields don't reflect the underlying fundamentals," he said.
Treasury's planned purchases are focused particularly on securities in the 10-to-20-year and 20-to-30-year portions of the market, where buying interest has been weak since late June. By purchasing older securities, Treasury can provide additional liquidity and potentially reduce some of the dislocations that have pushed yields higher.
Sullivan said the larger issue can't be solved simply through Treasury market operations. The government must continue finding investors willing to absorb an expanding supply of debt, while corporations and governments elsewhere are simultaneously issuing historically large amounts of their own bonds.
That competition for capital comes as one historically important foreign buyer has reduced its exposure. China's holdings of U.S. Treasurys have fallen to an 18-year low, adding to questions about the composition of future demand as Washington's financing requirements increase.
The scale of that requirement is growing faster than previously anticipated. U.S. national debt reached $40 trillion this week, only about six months after the Congressional Budget Office projected that federal borrowing would stand near $39.4 trillion at the end of the fiscal year.
Higher interest rates are magnifying the fiscal consequences. The CBO projects annual interest payments on federal debt will exceed $1 trillion this year, putting debt-service costs roughly in the same range as the Pentagon's annual budget.
Interest expenses already absorb approximately 19% of federal revenue, according to the Peter G. Peterson Foundation. If current trends persist, that share is projected to reach 26% by 2036, leaving a smaller portion of government revenue available for other federal programs.
The rapid accumulation of debt is also shortening the runway before Washington encounters its next borrowing-limit confrontation. Congress raised the debt ceiling to $41.1 trillion last year, leaving little more than $1 trillion between current debt levels and the statutory limit.
