Wall Street is positioning massive trading strategies around the trend of US Treasury short-term bill issuance approaching historic levels, as the Treasury Department's borrowing patterns draw intense market scrutiny.

Bank of America, JPMorgan, and Goldman Sachs project the US Treasury will issue approximately $1 trillion in short-term Treasury bills over the next year. Meanwhile, following the Federal Reserve's first rate hike this week, investors are focusing on the short end of the yield curve, betting the central bank will ultimately win its inflation fight, with two-year Treasury yields surging to multi-year highs around 4.75%. These two forces converging have turned the short-end Treasury market into the most closely watched trading battleground.

Bessent is attempting to suppress long-end rates through expanded long-term Treasury buybacks, yet his Treasury Department continues to rely on short-term debt to meet record borrowing needs. This strategy is fueling widespread concerns about interest rate risk and refinancing risk accumulation, while also raising questions about the policy's internal consistency.

Major banks forecast short-term issuance approaching $1 trillion

Wall Street's major banks are highly aligned in their projections for US Treasury short-term bill issuance, all pointing to historic levels. Bank of America predicts the US will net borrow approximately $1.07 trillion through bill issuance in the current fiscal year ending September 2027, excluding amounts used to repay maturing debt. JPMorgan expects $1.09 trillion in bill issuance for calendar year 2027, while Goldman Sachs projects $961 billion.

According to Bank of America's estimates, outstanding bill supply would reach approximately $8 trillion, representing 24.3% of marketable Treasury debt. Goldman Sachs projects this ratio to reach 24.3% in 2027 and further rise to 24.9% in 2028, approaching recent pandemic-era peaks. This level significantly exceeds the official target of approximately 20% set by the Treasury Borrowing Advisory Committee, which consists of market participants who view 20% as a reasonable balance between interest costs, debt financing volatility, and refinancing risk. Over the past two decades, the bill ratio has only briefly exceeded 25% during the 2008 financial crisis and the pandemic.

Bessent's policy paradox: from critic to executor

This situation places Bessent in an awkward position. He has publicly criticized former Treasury Secretary Yellen for over-relying on short-term debt issuance, accusing her of "taking control of monetary policy" and "significantly easing financing conditions" before the 2024 election. However, the Treasury under Bessent's leadership is now continuing and even expanding this approach.

Meanwhile, Bessent unexpectedly announced last month an expansion of Treasury buybacks for 10-to-30-year bonds, aiming to suppress long-end rate increases. Some analysts point out that the funds for these long-term bond buybacks may be raised precisely through increased short-term debt issuance, further adding to bill supply pressure. One-year bill yields currently stand at approximately 4.4%, below the 10-year yield near 5% and the 30-year yield around 5.3%, making short-term borrowing cost-advantageous. However, the Fed's rate hike this week to the 3.75%-4% range, along with signals of further increases, places sustained upward pressure on refinancing costs for short-term debt.

A Treasury official noted that since 1970, bill issuance as a share of total issuance has averaged 24.3% historically, while as of last month that figure stood at 22.8%, below the long-term historical average. The average during Trump's second term was 21.7%. The official also pointed out that money market fund assets under management total approximately $8 trillion, stablecoin demand continues to grow, and the Fed has purchased over $300 billion in bills year-to-date, indicating significantly increased investor demand for bills.

Risk debate: refinancing pressure and rate volatility

Market participants remain sharply divided over the risks of short-term debt dependence. Mark Cabana, head of US interest rate strategy at Bank of America, says the Treasury is attempting to "balance supply and demand" in the government bond market, but large-scale short-term debt issuance will lead to interest expenses that are "larger and more volatile." Adam Josephson of Sakonnet Research holds similar views, arguing that higher bill ratios increase the volatility of debt servicing costs.

Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, warned that "extraordinary reliance on the short end makes us highly vulnerable to elevated refinancing risk." However, Joe LaVorgna, former economic advisor to Bessent and current chief economist for the Americas at SMBC Nikko Securities, argues the rising bill ratio is "no big deal." He says the absolute numbers look large because the fiscal deficit itself is massive, but proportionally, "it's not entirely abnormal by historical standards."

Bessent himself maintains that the US can resolve debt pressures through economic growth. "In America, we don't have a revenue problem, we have a spending problem. We're trying to control spending and then grow our way out at 3%," he said earlier this month.

Short-end trading: betting on the Fed's ultimate victory

Beyond supply-side expectations, demand-side dynamics are also shifting notably. Following the Fed's first rate hike in this cycle, investors are actively positioning in short-term Treasuries, with the core thesis being that Fed Chair Warsh's pledge to fight inflation with full force will ultimately materialize, bringing inflation under control. Two-year Treasury yields have risen approximately 140 basis points from February lows and now sit well above the Fed's new 3.75%-4% rate range. Futures market pricing indicates the Fed will hike an additional cumulative 80 basis points over the next year.

Kevin Flanagan, head of investment strategy at WisdomTree, says, "If you look at any part of the yield curve right now and ask where yields are overshooting, the answer is clearly the short end. Two-year yields are far above the current fed funds rate, signaling the short end has gone too far." George Bory, chief fixed income investment strategist at Allspring Global Investments, says the firm added bond exposure after Warsh's Jackson Hole commitment to restoring price stability, and the recent Fed meeting further reinforced their conviction. He advises clients that "now is a good time to add duration toward the middle of the curve."

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, highlights the risks: "The question is how you build confidence in where the terminal rate will be a year from now. The risk is that in every hiking cycle, markets underestimate how far the Fed ultimately goes." Trevor Slaven, head of multi-asset portfolio solutions at Barings, believes the current two-year yield near 4.75% already exceeds the market's swap-priced expectation of the Fed pushing rates to 4.68% by September 2027. "The short end is where you can build the most compelling argument for genuine value right now," he says.