The Treasury has changed the way it is financing the government’s debt, by relying more on the issuance of short-term Treasury bills.
While short-term securities normally come with lower interest rates, the over-reliance on securities with maturities of less than 12 months carries risks to markets and the economy.
The extent of short-term issuance
In 2025, 84% of the government’s debt issuance was made up of Treasury bills with maturities of 12 months or less, the highest ratio since the financial crisis.
For several years since the financial crisis, the Treasury Department was able to issue longer-term notes in the range of 1% to 2% as the Federal Reserve held interest rates near zero.
Those days are over. But the Treasury seems intent on stretching its ability to issue short-term paper as it seeks to keep its debt costs down. As with anything, there is no free lunch.
No. 1: Turnover risk
The risk of an undiversified stock of debt is known in finance as turnover risk. In the months ahead, as those T-bills mature, the Treasury faces the risk of refinancing those securities at much higher rates. Higher interest payments would only add to the cost of carrying the original debt.
No. 2: Insufficient bank reserves
The unusual period from 2023 to 2024, characterized by high inflation, tight monetary policy and increased short-term debt issuance, created the basis for low levels of bank reserves and, consequently, eroded the safety of the banking industry.
When the returns on T-bills were within range of longer-term Treasury notes, investors parked their holdings in the Fed’s overnight money market facilities.
Because funds in those facilities are essentially cash, the level of bank reserves surged, moving from so-called ample levels of reserves to abundant.
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This abundance was reflected in the significant size of the Federal Reserve’s overnight repo facility before 2025. But as money markets bought up T-bills in 2025, the overnight repo facility was drained, sending bank reserves from abundant to merely ample and possibly worse.
The minutes of the December meeting of the Federal Open Market Committee pointed to members’ concerns about this decline, particularly with the April tax season approaching.
In response, the Fed has been purchasing T-bills, injecting cash into the financial system and maintaining ample bank reserves.
No. 3: Distortions in monetary policy
The reliance of T-bill issuance is affecting how monetary policy is transmitted to the financial sector. The repo market has become a large source of funding for the operation of the economy, and the distortions (increased spreads) of the market (repo) rates compared with the administered (effective federal funds) rate need to be managed.
To address what the Fed sees as a reluctance to park funds in its repo facility, the FOMC minutes suggested that the Fed clarify its intended role, conveying the expectation that they would be used when sensible, and eliminating their limit of use.
No. 4: Sustainability of debt
Finally, the government’s debt has been growing since 2016. The debt-to-GDP ratio approached 100% of GDP in 2020, during the pandemic, and again in 2024 and 2025 when government spending matched the economy’s output.
While this ratio is not a determinant of the economy’s ability to generate output, and while we have yet to see a surge in interest rates when there is a loss of confidence, more and more tax revenues are going toward the cost of servicing the debt.
That implies the possibility of private investment being crowded out and the degradation of growth as in the case of Japan.
The takeaway
While the issuance of short-term Treasury bills might make sense in the short run, the over-reliance on the strategy opens up the possibility of distortions in the financial markets and increased risk of higher costs should inflation spike higher.
