Key Takeaways:
The Federal Reserve isn't in the bailout business, Chairman Kevin Warsh told Congress this week, but near-record peacetime deficits forcing roughly $2 trillion in annual Treasury issuance are testing that principle as the market's investor base undergoes a structural shift.
"In periods of crises like the 2020 pandemic and the 2008 crisis, central banks by design need to step into markets to create a fair price," Warsh said in congressional testimony, while warning against crossing the line into fiscal dominance.
Price-insensitive investors — foreign central banks, the Fed itself and commercial banks — owned 75 percent of all outstanding Treasury debt in 2007. That share has fallen to 52 percent, according to Fed data cited by the Wall Street Journal. The balance has shifted to price-sensitive players including hedge funds, whose share of Treasury holdings jumped from 4.5 percent in 2023 to 8.5 percent by last September. These funds finance bond purchases with short-term repo loans from a concentrated group of dealers, a structure the Bank for International Settlements has flagged as a potential weak link.
The risk is that a sudden pullback in repo lending forces leveraged funds to liquidate Treasury positions en masse, sending yields sharply higher — a scenario that played out in March 2020 and required massive Fed intervention to calm. With the 30-year yield now trading 0.5 percentage point above the 10-year, up from 0.2 in early 2025, investors are demanding more compensation for holding longer-dated debt, reflecting growing concern about future deficits and inflation.
The shift in ownership is mirrored in auction dynamics. Dealers routinely bought 40 percent to 50 percent of Treasurys at auction in 2010; this year they bought just 10 percent to 15 percent, according to JPMorgan Chase data. The International Monetary Fund has found that 30-year yields have moved significantly more on auction days since 2022 than in the prior eight years, suggesting dealers want more compensation for carrying inventory.
The Trump administration has taken steps to address the market's fragility, dialing back bank capital requirements to encourage dealers to hold more Treasurys. It is also pushing adoption of stablecoins, which in turn spurs demand for Treasury bills as backing. But its most consequential move has been to hold down issuance of long-term bonds in favor of short-term bills, which have grown from 15 percent of total debt in 2019 to 22 percent now. Absent larger bond auctions, that share will hit 25 percent in 2028, according to the Treasury's private-sector advisory committee — well above its recommended 20 percent ceiling.
"We know the administration has a stated goal of lowering long-term rates," said Jay Barry, head of global rates strategy at JPMorgan. Declining to expand bond sales so far could be seen as an effort to keep long-term rates down, he said, "knowing the midterms are coming up."
The math becomes more difficult starting in the next two years. A slug of debt issued during the pandemic will need refinancing, and Treasury's borrowing capacity without expanded bond auctions will fall roughly $1 trillion short of annual budget deficits, Barry calculates. At some point, the government will have to expand sales of long-term debt, increasing the risk something goes wrong in the market machinery.
The last time the Treasury market seized up — March 2020 — the Fed stepped in with massive lending and bond purchases to restore order. The Bank of England did the same in 2022 after then-Prime Minister Liz Truss's proposed tax cut triggered a surge in gilt yields. Warsh himself has criticized the Fed for continuing to buy bonds after those crises passed, and his testimony this week drew a line between crisis intervention and fiscal dominance — the point at which central bank bond buying crosses from market stabilization into helping the government finance its debt.
Barry said the market does assume the Fed would step in if bond trading breaks down. But the question of where that line sits, and whether the Fed can stay on the right side of it in a future crisis, remains unanswered.
This article is for informational purposes only and does not constitute investment advice.
