As rates ramped up to cool the inflation caused by both the artificially low rates and excessive government spending, the interest expense on the debt began rising, and fast. Once again, the bureaucrats tried to hide the cost.
Yellen began radically changing the maturity schedule of the federal debt, running the Treasury almost like a hedge fund, in anticipation of Powell & Co. cutting rates several times this year.
Instead of the usual mix of short-, mid- and long-term Treasuries, Yellen reduced offerings of new bonds and notes and didn't replace some of the old ones at maturity. Instead, she flooded the market with T-bills.
Like all debt markets, Treasuries have the rules for Supply and Demand reversed. In other words, increasing supply of issuance doesn't decrease price (interest rate) but increases it. That's because increasing the supply of debt is really increasing the demand for loanable funds. The nomenclature is backwards in modern parlance because, in our fiat monetary system, debt is money and serves as tradable securities.
So, the huge increase in T-bill issuance drove interest rates higher on those securities, without having as much of an impact on T-notes and T-bonds. This completely destroyed what was left of the yield curve, already damaged by Powell & Co.'s own manipulations.
Normally, a borrower pays a premium for keeping the lender's money for a longer period of time. All else being equal, term increases yield on debt and associated securities. Not so today, because Yellen is actively engaging in yield curve control, similar to what she did during her time as Federal Reserve Chair.
The rationale here is two-fold: shorter-term debt allows the treasury to take advantage of rate cuts (soon?) and—more importantly—many private market rates are based off of rates on Treasuries, especially the 10-year and 30-year.
Pushing trillions of dollars out of longer-term debt and into T-bills has created a very inverted yield curve (shorter term = higher yields) for Treasuries but also created considerable inefficiencies. Yellen's yield curve manipulations account for about 10% of the interest being paid on the debt - that's over $100 billion annually.
Despite the higher cost to taxpayers, officials will point to the artificially low rates on the 10- and 30-year as proof that everything is fine. The scary part is that the maturity schedule of Treasuries has to normalize eventually, and that's where things get really ugly.
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So, that's where we are and how we got here. Now, where are we going?...
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