The Big Idea
Incentives for Treasury to keep maturities short
This material is a Marketing Communication and does not constitute Independent Investment Research.
The US Treasury may have another reason beyond interest cost for hesitating to boost issuance in the long end of the yield curve. The average maturity of marketable debt already is arguably too long when it comes to balancing funding cost against rollover risk. With the Congressional Budget Office projecting debt-to-GDP of 124% in the next decade and with term premiums likely to rise, balancing cost and rollover has become more important than ever. A move toward shorter funding could shift potential for tighter swap spreads toward the front of the curve.
Outstanding marketable Treasury debt approached the end of last year at a relatively long weighted average life of 70.8 months or 5.9 years (Exhibit 1). That compares to an average of 61 months or 5.1 years since 1980.
Exhibit 1: Current marketable Treasury debt shows a long average life
Source: Treasury presentation to TBAC, FY2024 Q4 report
The average life of marketable debt reflects Treasury’s effort over years to balance debt cost against rollover risk. With yields typically rising with maturity, funding off the short end of the curve usually lowers costs on average but exposes the Treasury to more rollover or variability in funding costs. Funding off the long end, on the other hand, reduces rollover at the expense of higher interest rates. The weighted average life shows where Treasury has struck the balance.
The historic cost of funds and the variability of that cost at different maturities sheds some light on why Treasury has struck the balance in the middle of the curve. The Treasury has reported average pricing or yield on all auctions from bills out to bonds since November 1979. From February 2006 to the present, Treasury has issued consistently across the curve, except for the 7-year part. That allows comparison of the average rate and the variability of that rate across the curve under consistent conditions. And the average yield and the standard deviation of that yield at different maturities creates a picture of the tradeoff between debt cost and rollover risk (Exhibit 2).
Exhibit 2: The cost and variability of funds at different Treasury maturities
Note: Yields based on Treasury auction results from February 2006 to July 2025. Prices on bills converted into bond-equivalent yields.
Source: Treasury Securities Auction Data, Santander US Capital Markets.
The picture shows that bills have realized an average rate of 1.83% with a standard deviation of 2.01%, nearly the lowest cost but definitely the highest variability of any point along the curve. At the other end, 30-year bonds have realized an average rate of 3.28% with a standard deviation of 0.92%, the highest cost and the lowest variability of any point along the curve. But the most interesting results come in between. The 2- and 3-year parts of the curve have funded at yields comparable to bills but with much lower variability. The 5-year part of the curve further reduces variability but at the cost of an average interest rate roughly 50 bp higher than the shorter maturities. The 10-year part of the curve has offered funds with variability comparable to the middle of the curve but at a significantly higher interest cost. Depending on appetite for rollover risk, history suggests the sweet spot is somewhere in the 3- to 5-year part of the curve.
The conclusion that the weighted average life of outstanding Treasury debt is already too long is consistent with recent analysis from the Brookings Institution. Taking a forward-looking view of issuance and projecting future economic conditions, the Brookings piece concluded that the structure of debt maturities in early 2023, when weighted average life reached nearly 75 months, would only gain a little more stability by going longer and at a significant cost. On the other hand, shortening the debt’s weighted average life would add variability but at significant savings.
Lately, term premiums along the yield curve have gone up, raising the relative cost of issuing at longer maturities. A high ratio of debt to GDP, continuing fiscal deficits, volatile US policymaking and even recent political pressure on the Fed argue for even higher term premiums. The relative cost and volatility of funding at longer maturities looks likely to continue to rise.
No issuer should fund at a single point on the yield curve, and the Treasury’s traditional approach of being a regular and predictable issuer means that any shift in weighted average life would almost certainly take time. Moving the weighted-average-life battleship would involve programmatic issuance that would take time to put in place and take time to unwind. Even if the Treasury wanted to lock in low rates in 2020 and 2021, it is unlikely it could have captured the full opportunity in time and likely would have been issuing at higher rates as the Fed hiked in 2022 and beyond.
The balance between cost and rollover risk for now looks like a shorter maturity than the current outstanding Treasury market. Maybe that is what Treasury has come to realize as it considers the debt mix. That could mean more issuance in the front of the curve than the market currently expects, tightening swap spreads at 5-year and shorter maturities, and possibly less issuance than the market expects at longer maturities, marginally widening spreads there.
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