Next month, in an interview with Tucker Carlson, J. D. Vance said he worried about the U. S. government bond market in the early stages of a Trump administration. Because of Biden-Harris investing, the U. S. is adding about$ 2 trillion to the national debt every month, he said, and” The only thing that makes that decent is that interest levels are also very low”. If interest rates go significantly higher, say to 8 per-cent,” that can become a large circular that may get down the income of this region”.
Vance claimed that selling U.S. government bonds would cause interest rates to rise sharply if foreign investors and foreigners, who are beneficiaries of globalization, tried to overthrow the novel Trump administration. Vedder noted that this happened in Britain in late 2022 when newly elected Prime Minister Liz Truss announced a plan of tax breaks. This was in part because of the Bank of England’s activities and the business response, and many buyers and retirees experienced significant losses as a result. In consequence, Truss ‘ government was overthrown in less than two weeks.  ,
According to Vance, there are two ways to immediately reduce this relationship market danger. First, team the Treasury Department with intelligent individuals. Create flat tariffs ( not changing special interest rates ) to increase the tax base and generate income while also bringing jobs and economic activity back to the United States.
Lastly, Vance hinted that spending reductions may be pursued. He noted that there were 4.5 trillion dollars spent annually by the federal government in 2019 and will increase to 6.5 trillion in 2024. Only a small portion of this$ 2 trillion increase comes from Social Security and Medicare, according to Vance, because the government has n’t yet reduced spending from the Covid response. Vance is right, and it should be noted that at least some of the spending increase between 2019 and 2024 ( about$ 500 billion ) is additional interest on the national debt. Given the high risk involved in this, Vance’s general concern is that if interest rates rise, the cost of servicing the debt will go up even more, which could lead to higher interest rates as investors seek a higher return on investment in addition to the high cost of loan service.  ,
Added Threat of a Bond Market Blowout
There’s an added, hidden threat of a bond-market price blowout that may experience the next management. The Biden-Harris administration’s plan to slash government debt issuance would swallow cash out of the real business ( and the stock market ) as interest costs rose as inflation increased. Because the money needed to pay off the government’s debts must originate anywhere, as well as, in most cases, the real economy.  ,
To avoid this, the Biden-Harris U. S. Treasury under Janet Yellen shifted to issuing very short-term government debt ( Treasury bills, maturing in less than a year ) in 2023. Because shorter-term debt costs more than longer-term debt ( the yield curve was inverted ) and because this reliance on short-term financing increases the risk of a spike in interest rates because a larger portion of government debt must be rolled over at market rates annually, this does n’t make sense financially.
In 2018, the share of Treasury bills ( maturing in a year or less ) as a percentage of the total bill was 15 percent. Today it stands at 22 percentage, a around 50 percent increase, adding to the amount of Treasury bills excellent by$ 10 trillion. This is a huge raise, given how numerous trillions of dollars need to be rolled over year-to-year.
Why did the move to issuing short-term loan pause the economic impact caused by the country’s growing debt load? It is riskier for the nation in the long run. Due to the use of an acronym called Overnight Reverse Repo ( OR RRP ), a facility at the Federal Reserve that was employed during the Covid stimulus to prevent money market rates from falling ( money market funds are ultra-short-term funds where businesses and investors park their cash to receive a small return ). Money market funds with money in the ON RRP are compelled to take money out of the ON RRP and purchase the freshly issued short-term Treasury bills in the event that the Treasury problems short-term loan maturing at a slightly higher rate than the one at the Fed’s ON RRP service. This avoids a liquidity hit on the economy, as cash is coming from the ON RRP, not the broader economy. However, this only works if the facility still has money in the ON RRP.
It turns out that the ON RRP will be completed just in time for the U.S. election. This, of course, is no accident. To put it bluntly, the Biden administration made America’s debt worse to make the economy look better and hide the debt problem through an election, leaving Trump’s new administration a potential time-bomb.
Right now, Treasury has a roughly$ 800 billion cash balance. However, this will quickly dwindle as the government spends nearly$ 2 trillion more annually than it needs. In order to cover all the government overspending, which was created by the Treasury in the first quarter of 2025 alone, between$ 500 billion and$ 1 trillion of new debt, the Treasury needs to issue more debt in the next quarter.
But this newly issued debt ca n’t be short-term Treasurys any longer — for one, the U. S. Treasury is already way over its skis on relying on short-term debt. Second, because the biggest reason to over-rely on short-term debt issuance ( the ON RRP facility ) is almost depleted. Now, this new debt issuance next quarter will impact liquidity and the broad market, whether it be via higher interest rates, lower stocks, a crowding out of private sector investment, or all of the above.
Of course, the Biden-Harris Treasury does not present its actions as nakedly political. The Treasury Department claims it will wait until the Federal Reserve stops selling off the Fed’s portfolio of notes and bonds over the next 12 years ( known as QT, or quantitative tightening ), which is the Fed’s quantitative easing, which uses electronically created money to purchase government bonds.
But the Fed’s job is n’t to bail out Washington overspending. Even an activist ( read bad ) Fed might delay ending QT if inflation is persistently high, but whether or not the Fed does its job is another story. A change in Fed policy wo n’t be enough to cover the anticipated massive Treasury issuance set to occur in 2025, even if the Fed completely stops QT or begins to buy bonds once more ( a very bad move for the working class ).
What Are the Potential Benefits of a New Administration?
Regarding staffing smart people at the Treasury, Vance is correct. These policies may not be the complete solution if the bond market sees a sizable increase in interest rates. The rollover risk is very real, and again, because 22 percent of the Treasury’s debt is held in short-term bills, the interest cost could rise quickly, leading to more long-end issuance, flooding the market with notes and bonds, and raising interest rates, which leads to even higher interest costs. This is the snowball effect from hell, and could derail the new Trump administration.
First, the new administration needs to explain why this is happening in a way that the average person can understand:” The Biden-Harris administration papered over the true cost of America’s debt load with a Covid-era pool of money set up by the Fed. Biden-Harris knew this would only get them through the election. Now, here’s how we move forward to fix this problem we were given”. Whether or not yields rise or fall during the bond market can be well known before any issues arise.
Second, more must be done on overspending. One approach could be capping non-defense, non-Social-Security, non-Medicare spending items in nominal dollars as of 2024. Lower spending can be gradually reduced rather than making drastic cuts. Other items should be specifically examined. For example, the Democrats used accounting gimmicks to claim the Inflation Reduction Act ( IRA ) would cost$ 391 billion between 2022 and 2031, but the real cost is estimated to be as much as$ 1.2 trillion. The next administration may want to keep some of the provisions of this law, but there is still room to limit the scope of the law’s uncapped nature. Priority should also be given to plans to reduce overtime and tips before the state and local tax deduction cap, which would benefit the wealthy in blue-states, is reversed.  ,
Thirdly, to reduce the risk of higher interest rates on government borrowing costs, Treasury must quickly switch more of the country’s debt from short-term bills to longer-term debt. Re-shoring, healthy food, and de-coupling from China are extremely beneficial policies to pursue, but they are also marginally inflationary, at least initially. Other factors, including the aging population in relation to the proportion of Americans in working age, are contributing to inflation.
It is wise to make a plan to cut down on short-term funding over the course of ten years as well.
Since writing an article for The Federalist would likely seriously compromise close relationships, their safety, or their jobs, this individual is given anonymity. We verify the identities of The Federalist’s anonymous contributors.
