This short note aims to decipher a striking chart related to current economic events. At a time when Moody’s is downgrading the United States’ sovereign rating, this Killer Chart looks at a specific aspect of US debt: the decline in its average maturity since 2023… A source of short- and medium-term risk?
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Why is this interesting?
First, we need to put this phenomenon into the context of recent years. Since June 2022, US Treasury securities have no longer benefited from the same support from the Federal Reserve (Fed), which, after several years of unconventional monetary policies, has entered a phase of reducing the size of its balance sheet (quantitative tightening, QT[1]). This normalization of monetary policy implies greater volatility in bond yields, which are more sensitive to changes in macroeconomic figures and their perception by current and potential holders of US sovereign debt securities.
However, since 2021, inflation has been anchored above the Fed’s +2% target, requiring an adjustment of key interest rates. This has led to a de facto rise in interest rates along the yield curve[2] and an increase in the average interest rate paid on public debt (see yellow curve on the Killer Chart above ). Despite a slowdown in inflation and a fall in key rates at the end of 2024, the United States has nevertheless faced increased uncertainty in recent months (tariffs, employment, budgetary situation, see this article), meaning that pressure on bond interest rates continues.
In this context, the rise in bond yields has been accompanied by a reduction in the average maturity of debt (see the increase in the share of bonds with a maturity of less than one year in total debt issued, blue curve in the chart[3]). It would appear that the US government has adapted its issuance strategy, substituting long-term bonds with short-term bonds in order to avoid a sharp increase in the public debt burden. Since the end of 2023, the government seems to have found it easier to place short-term debt securities[4].
What should we make of this?
By shortening the average maturity of its debt, a government generally exposes itself to refinancing a larger portion of its debt on a more regular basis, which is in principle a sign of a deterioration in the structure of public debt. This strategy can be « perilous » because it exposes the government to a higher refinancing risk.
It is common to see countries adopting such a strategy, often emerging economies, trying to keep the average interest rate paid on their public debt stable[6]. In addition, these economies make significant efforts to (i) curb inflation and (ii) consolidate their public finances, with the underlying idea of promoting lower interest rates in the short and medium term. When they succeed, they issue new debt with longer maturities and gradually extend the average maturity of their debt.
Is the United States capable of minimizing the risks associated with this shortening of the average maturity of its debt? There is more than enough room for doubt.
On the inflation front, if it declines (+2.3% year-on-year in April), the impact of the potential increase in tariffs from July 2025 would be particularly detrimental to the price trajectory in the United States. However, recent negotiations, with China for example, give hope that tariffs will ultimately be lower than those announced in early April and that the impact on inflation will be less severe. The Cleveland Fed’s 1-year inflation expectations are close to +2.7% in May[7], a figure that suggests inflation is on the rise but remains under control.
On the fiscal side, however, the risks appear to be clearly skewed to the upside, with the fiscal stimulus sought by the Trump administration (House Reconciliation Bill) raising serious concerns. The main issue is whether or not the fiscal measures introduced by Donald Trump during his first term in 2017 will be continued after 2026. According to the Committee for a Responsible Federal Budget, maintaining these measures would increase public debt by USD 3.3 trillion by 2034. From 2027 onwards, this would increase the public deficit by an additional 1.8 percentage points of GDP (already very high: -5.3% of GDP according to the IMF at this horizon).
At this stage, Trump’s budget proposal has not won over Congress, with several Republicans opposing it. A widening of budgetary imbalances would result in further pressure on bond yields and also threaten the trajectory of interest expense, which has already risen sharply since 2019: it accounted for 12.2% of public revenue in 2024, compared with 7.6% in 2019[9].
Even in a scenario where the Fed regains the leeway to resume its cycle of lowering key interest rates, an increase in the perception of sovereign risk could well counteract the transmission of lower short-term rates to long-term rates and weigh on budgetary balances. This probably offers a broader reflection on the difficulties of exiting unconventional monetary policies without shifting towards greater budgetary discipline!
V.L, article written on May 18, 2024
[1] QT involves the Fed significantly reducing its purchases of US Treasury securities and only partially refinancing the debt securities it holds when they reach maturity. For more information on the mechanisms of QT, see this article by Maëlle Vaille on BSI Economics.
[2] For more details, see this article by BSI Economics to understand the structure of the yield curve.
[3] In recent years, the share of sovereign bonds with a maturity of less than one year has gained nearly 6 pts in total government bond issuance, reaching 35%. Over the past year, this share has been on average 3 pts above its long-term average. On the other hand, the share of bonds with maturities between 1 and 5 years or between 5 and 10 years (50% of total securities issued) is down 3 points. For longer maturities (15% of the total), the share is slightly above the long-term average (+1.5 points).
[4] The bid-to-cover ratio has increased for bonds with a maximum maturity of 1 year, while since 2024, this ratio has tended to decrease for 5- and 10-year bonds (while remaining above 1). This ratio is the ratio between the total amount of bids submitted by potential buyers of securities and the total amount of securities actually issued by the Treasury. An increase in the ratio reveals a growing appetite among investors for the securities in question.
[5] The risk of paying a higher interest rate on debt that is maturing and needs to be refinanced than when it was issued.
[6] Without a reduction in inflation and/or fiscal consolidation, a refinancing risk arises. As a result, the interest burden increases to such an extent that the share of debt related to interest payments rises significantly and new debt issuance is used primarily to finance this increase in the interest burden. This situation leads investors to demand higher returns to purchase this debt, creating a negative spiral where higher interest rates lead to even higher rates.
[7] Consumer confidence is more worrying: +3.6% in April, +0.6 points compared to Q4 2024.
[8] Spendingcuts and other measures would be more than insufficient to prevent a massive increase in the public deficit, according tothe Committee for a Responsible Federal Budget.
[9] Interest expense ratios in the United States, as a percentage of public revenue and public spending, are much higher in 2024 than in economies with similar sovereign ratings (AAA to AA- rating segment): 2.9 standard deviations above the average for these economies for the ratio relative to revenue (this ratio was 1.4 standard deviations higher in 2019 for the United States) and 2.6 standard deviations for the ratio relative to expenditure (1.1 in 2019).
