Trump: Budget Deficits & Credibility

August 23, 2026 | The Treasury’s open market purchases of long dated debt have generated considerable confusion over the past week. The erratic behavior of President Donald Trump and the statements by members of his Cabinet make no sense. The biggest deficit in Washington today is credibility. The resulting surge in in Treasury yields boosted gold prices, crypto and other risk assets. 

In a live interview on CNBC, Secretary Bessent said his department is going “make a market” in the longer-dated securities where yields have been surging lately. Treasury then announced that it would be doubling its scheduled $2 billion in buybacks of longer-dated government debt, sending yields sharply lower – but only for a few hours.

One of the reasons that the US debt is becoming more and more problematic is that nobody in either political party wants to discuss fiscal responsibility. Congress has not engaged on the federal budget in a meaningful way in decades. The national Congress last passed all 12 regular individual appropriations bills on time before the start of the fiscal year in 1997.

Treasury Secretary Scott Bessent last Thursday said the U.S. can “grow” its way out of the $40 trillion national debt, a statement that is clearly wrong. If President Trump or Secretary Bessent were rational leaders, they would be demanding that the national Congress cut spending and raise revenue. 

Buying back long-dated bonds and refunding the deficit with T-bills is not a long-term strategy. At present, the Treasury has about $7 trillion in marketable T-bills outstanding, $16 trillion in notes and $5.5 trillion in bonds. The chart below shows the outstanding Treasury bonds by coupon with the oldest securities starting on the left side of the chart.

Source: US Treasury

As the Treasury slowly but surely stops issuing long-dated bonds and replaces these borrowings will short-dated notes and T-bills, short-term interest rates will rise inexorably and the yield curve will be in a permanent inversion or backwardation. The Fed will be forced to buy more and more Treasury T-bills to keep interest rates from rising further.

Indeed, the US is fast approaching the point where Congress will be forced to consider higher taxes and spending cuts, even in the context of rising interest rates. Imagine the economic consequences of fiscal reductions as short-term interest rates are forced higher – not by the FOMC – but by the financial markets. Such a scenario has heretofore been unthinkable, but we submit that the Treasury’s strategy of front-loading issuance with T-bills makes it inevitable.

The Treasury began to repurchase securities in 2000 primarily because the federal government had large budget surpluses. The government was taking in more cash than it needed and rapidly shrinking the amount of national debt held by the public. Since the early 2000s, however, federal budget deficits have grown enormously especially during COVID, when the government issued trillions of dollars worth of securities with very low coupons. 

The U.S. Treasury under Secretary Janet Yellen revived its bond buyback program in May 2024 primarily to improve market liquidity for older, less-traded ("off-the-run") securities and to manage cash balance volatility.  When the Treasury restarted purchases of bonds and notes in 2024, the operations were focused to a large degree on buying back low coupons for liquidity purposes. 

Investors and dealers avoid low coupon securities because they generate negative returns vs funding costs. Buying back low coupon securities improves market liquidity, reduces volatility and lowers the duration of Treasury securities, as we discussed last year (“Should Treasury Accept Debt for Tax Payments? Bank OZK Update”).

Whereas in 2024 we were buying low coupon notes and bonds to improve market liquidity, now we are buying current coupons because of slack demand on the long end of the yield curve. This is a fundamental change in strategy that illustrates the alarming erosion in the market position of the Treasury. When the Treasury buys back longer dated securities, it issues bills to replace them. When the Treasury market is comprised mostly of T-bills, what will the Treasury do for an encore?  

In 2024, Secretary Yellen and the Treasury emphasized that the buybacks were not a form of monetary policy easing or backdoor quantitative easing (QE), pushing back against critics who argued it was designed to manipulate financial conditions or manage long-term borrowing costs. The suspicions regarding Yellen’s motives were fueled by her support for “Operation Twist” during her tenure as Fed Chair (See “The Martyrdom of Jerome Powell”). 

Secretary Bessent described last week’s move as an effort to provide “liquidity support” to longer-dated securities during a slow August,” notes Komal Sri-Komal: “But the timing made the real objective difficult to disguise. The announcement came one day after the 30-year yield touched a 19-year high — and just two weeks after Treasury had published a buyback schedule retaining the previous $2 billion limit.”

The plain fact seems to be that Secretary Bessent and the Trump White House panicked last week, fearing that the auction of 20-year Treasury bonds would go more poorly than expected. As it was, the bid-to-cover ratio was only 2.58x for every dollar of bonds offered, a poor result and below the 2.62x average of the past six months, the Wall Street Journal reports. A strong auction is anything above 3x bid-to-cover.

The 20-year bond is the least favorite maturity of US Treasury debt and was actually discontinued in 1986. The 20-year bond was reintroduced on May 20, 2020 to help finance rising national debt. Since its 2020 relaunch, individual monthly auctions routinely track closely around a mean average of 2.65x, with recent 2026 sales ranging from a lower end around 2.36x to highs near 2.75x, according to CME Group.

Just hours before the auction, the Treasury announced it would double long-end liquidity support buybacks from $2 billion to at least $4 billion per operation starting in September. This lowered long-term yields by roughly 5 to 10 basis points ahead of the sale. The Treasury sold $18.06 billion in 20-year bonds at a high yield of 5.204% (up from 5.163% in July).

The fact that Secretary Bessent felt the need to make an announcement of increased bond buybacks in front to the 20-year auction suggests that the Treasury is expecting more weak auctions going forward. How else do we explain Bessent’s behavior? But more important, when will President Trump and Secretary Bessent stop pretending that the situation in the Treasury debt market is not a problem? 

When short-term expedients like Treasury buybacks of long bonds and issuance of T-bills no longer suffice, then the only remaining policy tool will be for President Trump to pick up the phone and call Fed Chairman Kevin Warsh to ask the central bank to restart massive purchases of government debt or QE. And what happens if LT interest rates don’t fall when the Fed starts buying bonds? 

In the event, do you think that President Trump will have the courage to declare an economic emergency and ask Congress to cut spending or raise taxes? Merely slowing the growth in federal spending would buy the Treasury time to fashion a more durable long-term plan, but the bottom line is that the Congress needs to voluntarily eliminate the federal deficit – now 6% of GDP – before the markets force the change via higher ST interest rates. 

A sudden upward surge in interest rates would cause a wave of insolvencies among consumers and private business, threatening the US with another wave of debt deflation a la the 1930s. In "The Debt-Deflation Theory of Great Depressions", Irving Fisher argued that severe economic depressions are driven by a vicious cycle where over-indebtedness leads to liquidation, which triggers deflation, making the real burden of remaining debt even heavier.  

But unlike a century ago, when speculation and private debt were the catalysts for deflation, today it is the public sector that threatens us with catastrophe. Will President Trump, Secretary Bessent and the Congress go on pretending that nothing is wrong? Even a small step toward fiscal sanity would cause interest rates to fall without any action by the Fed. But that small step must be followed in short order by concrete action and higher government revenue.  

“If one charges net income to pay debt and that amount is only payable by reducing other essential expenses, the economy contracts,” notes our friend Fred Feldkamp. “So, the only source available to extinguish the debt without causing a reduction of economic activity is payment from the ‘free cash flows’ of those with net income in excess of all essential living costs, as had been the case until recently for the hyperscalers. Higher interest rates can trigger an avalanche driving obligors bankrupt.”

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