The Treasury’s own advisory panel of Wall Street bond dealers, the Treasury Borrowing Advisory Committee (TBAC), quietly warned in minutes released August 5 that Washington faces a $1.45 trillion funding shortfall in fiscal 2027-28.
Treasury Secretary Scott Bessent has been financing a $1.9 trillion, or 5.8% of GDP, per CBO, rather than 10-year notes at 4.68% or 30-year bonds at 5.25%. The 30-year is not above 5.26%.
While T-bills offer a cheaper percentage, given their short-term nature, there is significant rollover risk when the maturing debt must be refinanced in the future at potentially higher interest rates.
Bessent previously repeated a criticism of the monetary policy of Janet Yellen as “activist Treasury issuance,” because she used the same tactic in 2024. Now, the shoe is on the other foot, and the current Treasury Secretary is doing the same thing. Wall Street has its doubts.
Typically, Treasury bills account for between 15 and 20% of total Treasury-issued debt outstanding. Bank of America expects T-Bills to account for nearly 25% of debt by fiscal 2027 if Bessent doesn’t change course.
Bessent’s 3-3-3 Math Stops Adding Up
Expounding on the more immediate $1.45 trillion shortfall, JPMorgan forecasts a $3.7 trillion funding gap arising between 2027 and 2030. While Bessent has expressed his goal to have the deficit represent 3% of GDP, it currently sits at 5.8%. Sticky inflation, tariff rebates, rising energy costs, and slow growth have all contributed to the current deficit-to-GDP rate.
In June, Bessent said that 3% GDP growth was still possible for the year. That was when the Iran war seemed to be winding down. However, geopolitical uncertainty is still very present. JPMorgan forecasts 1.5 to 2% GDP growth for the year.
Cheap Today, Repriced Tomorrow or The Rollover Trap
While issuing 30-year bonds at current yields would increase fixed interest rates for years, Bessent’s growing preference for short-term T-bills is not without risks. Over $9 trillion of U.S. debt is owned by foreign governments and overseas private investors.
As previously reported in Disruption Banking, Japan owns $1.2 trillion of U.S. debt. The yen has been sinking all year, prompting Japan and recently the U.S. to buy billions of yen.
Japan’s interest in propping up its own currency is obvious. The Treasury’s reasons for spending $5 to $10 billion on Japanese yen lies in U.S. interest rates. If Japan starts selling U.S. treasuries en masse, it will spike yields across the curve.
The U.S. currently spends $3 billion on interest payments a day and is projected to spend over $1 trillion in interest in 2026, more than the defense budget. Because the Treasury must continually fund the government, that means it’s constantly refinancing. Therein lies the risk of relying on short-term T-bills in an inflationary environment.
Two Balance Sheets, One Bond Market or Warsh Owns the Other Half
The new Fed chairman Kevin Warsh is not a fan of the Fed’s rampant bond-buying that began in the aftermath of the 2008 financial crisis and was amplified in 2020. By 2022, the Fed’s coffers rose to $9 trillion.
Since then, after a period of quantitative tightening (QT) that ended in 2025, the Fed’s holdings now stand at $6.7 trillion, a number which Warsh would like to reduce substantially more. However, if and when the Fed begins selling off 30-year bonds in the open market, it will raise the bond yield and interest rates.
So far, Warsh has not moved to sell off any of the Fed’s holdings. Given the uncertainty surrounding a rate hike at the next FOMC meeting, it’s unlikely Warsh will make any big moves before September.
However, the Fed announced five task forces in July that are set to report their findings in December on balance sheet policy, inflation frameworks, among other topics. It’s quite possible that task force findings will encourage the Fed to shrink its holdings of long-term bonds.
Big Tech Is Outbidding the Treasury
Another market factor which might be encouraging Secretary Bessent to favor T-bills is the massive explosion of AI-related corporate debt. So far in 2026, companies have sold $1.5 trillion in corporate bonds to finance AI, a 36% increase from 2025.
Unlike the U.S. government, many of the major players in Big Tech, like Amazon and Alphabet, run positive balance sheets. Their credit quality means investors treat that paper as a near-substitute for government debt, and the sheer volume of supply is what forces the yields up.
Alphabet recently issued a 30-year debt offering at 6.4% interest, which is 1.15 percentage points higher than long-term U.S. bonds. Meta recently financed a data center, paying over 7.5%.
Bond investors, both domestic and foreign, are shifting out of U.S. treasuries and into corporate debt. Given that mortgages and certain consumer loans are largely tied to long-term bond yields, the rise of AI debt could spur the Treasury to minimize its issuance of long-term bonds.
However, if inflation remains sticky, the Treasury might still pivot back toward long-term debt. This could happen just as the Fed starts unloading its own long-term bonds. In that scenario, there are two waves of supply meeting a thinner pool of buyers, made that much thinner by the AI boom.
Two Waves, One Thin Bid
Every path out of this runs through the same market. Bessent can keep rolling bills at 3.7% and hope rates fall before the paper matures. He can pivot back to 30-year issuance at 5.25% and lock in the cost for a generation. Warsh can leave the Fed’s long bonds alone or start selling them into a market already absorbing $1.5 trillion a year in corporate supply. Each choice pushes the problem onto a different desk.
What TBAC did on August 5 was put a number on the collision. $1.45 trillion is what the Treasury’s own dealers see missing at current auction sizes, and they are the people who have to buy it. Bessent has said he wants the deficit at 3% of GDP. CBO has it at 5.8% and the first 10 months of the fiscal year came in worse than that. Interest costs alone now run higher than the Pentagon’s budget.
The Treasury Secretary who spent 2024 warning about short-term financing gimmicks is running the largest one on record. He is not wrong that the bills are cheaper today. The question is who is standing at the auction when they come due.
Author: Tim Tolka, Senior Reporter
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
See Also:
Why the U.S. Sold Europe’s Currency to Save Japan’s | Disruption Banking
