Treasury Advisory Panel Flags $1.45 Trillion Funding Gap as Treasury Leans on Short-Term Debt
The Treasury Borrowing Advisory Committee warned that current auction sizes could leave the government with a $1.45 trillion shortfall for fiscal 2027-28, as the Treasury relies heavily on short-term bills to finance a roughly $2 trillion annual deficit.
The Treasury Borrowing Advisory Committee (TBAC) warned on Aug. 5 that, at present auction sizes, the U.S. government could face a $1.45 trillion funding shortfall in fiscal 2027-28. The panel, composed of senior bond dealers and investors, said the shortfall stems from the Treasury’s heavy reliance on short-term Treasury bills, which currently yield about 3.8%, to finance an estimated $2 trillion annual deficit.
By favoring cheaper short-term borrowing, the Treasury has kept reported borrowing costs low but increased exposure to rising interest rates and inflation. TBAC minutes noted that interest expenses rose by $120 billion this year, pushing total annual debt-service costs above $1 trillion, surpassing U.S. defense spending.
Federal Reserve analyst Jon Hilsenrath warned that the growing debt could expose vulnerabilities in the financial system. “If there are cracks that show up in the financial system over the next few years, I’ve been expecting them to show up in Treasury debt,” he said, adding that “all the growth has been in federal debt.”
Hilsenrath also highlighted a potential clash between Treasury and the Federal Reserve. As the Treasury may shift back to longer-term bonds, the Fed under Chair Kevin Warsh plans to reduce its balance sheet, likely selling long-term Treasuries. The TBAC minutes indicated dealers expect the Fed’s holdings to move toward shorter-term securities, which could create two simultaneous waves of long-term supply with fewer buyers.
The current approach dates back to Treasury Secretary Janet Yellen, who increased short-term bill issuance to lower long-term yields. Bessent, Yellen’s successor, has continued this strategy, despite earlier criticism of Yellen’s “activist Treasury issuance.”
Higher Treasury yields are also influencing mortgage rates, which now exceed 6% compared with rates around 4% in many developed economies. Foreign holders such as Japan and China have begun diversifying into assets like gold, reducing their reliance on U.S. bonds.