By Vivien Lou Chen
‘The big risk is that market participants balk at the amount of bills that are coming to the market,’ said strategist Lawrence Gillum of LPL Financial
Investors have been enjoyed a more than monthlong rally in the 30-year U.S. government bond that pushed its yield below 5% in June, partly as the result of growing expectations for 2025 rate cuts by the Federal Reserve.
June’s bond-market rally, however, could give way to a different trading dynamic in July that results in a fresh round of volatility in the government’s shortest-term debt obligations, known as Treasury bills.
This volatility showed signs of beginning to surface on Monday, with a spike in the yield on the 1-month Treasury bill BX:TMUBMUSD01M to almost 4.19%.
For much of this year, longer-duration U.S. government bonds took the brunt of investors’ concerns about the fiscal outlook and a rising federal deficit, as demonstrated by the sharp selloff seen in the 30-year bond in April and May. Bond yields and prices move in the opposite direction.
Helping to ease those concerns lately have been stable inflation data, expectations for a wobbly labor market going forward, rising market-implied probabilities of Fed rate cuts starting as soon as July, and speculation that President Donald Trump may pick a successor to Fed Chair Jerome Powell who might lean more toward lowering interest rates sooner, said Derek Tang, an economist at Monetary Policy Analytics in Washington.
Now, changes being made in the Senate to Trump’s big bill of tax breaks and spending cuts could increase the national deficit by almost $3.3 trillion between 2025 and 2034, according to the nonpartisan Congressional Budget Office. Government deficits require increased issuance of Treasurys to finance the shortfall between government spending and revenue. One of the most important questions now is how much of that issuance will come in the form of short-term T-bills that mature in a year or less, or longer-dated maturities anywhere between two to 30 years out. Trump, who wants to sign a final version of the bill by July 4, indicated during a press conference last week that he favors using T-bills over longer-dated Treasurys, saying that “I’ve instructed my people not to do any debt beyond nine months or so.” Read: A 2-month rally pushed the stock market to record highs – but watch for these risks in JulyIf the president’s bill gets through Congress and signed into law, concerns about too much supply of Treasurys and possibly not enough demand will be back in play, albeit in the shortest-term part of the market, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer LPL Financial. These issues have the potential to translate into higher short-term T-bill rates than would otherwise be the case, and a lack of investor demand at future bill auctions, he said. However, yields on longer-dated Treasurys could fall, offering some relief for investors, Gillum added. “The big risk is that market participants balk at the amount of bills that are coming to the market,” he said via phone. “They may not want to digest all of that. This could be disruptive to the front end of the curve and move yields there higher.” He notes that the Treasury Borrowing Advisory Committee, which advises the U.S. Treasury, has recommended that up to 20% or slightly higher, of the government’s outstanding debt be in the form of bills, but this number could increase. If the bill doesn’t make it through Congress or into law, “then we have to worry about the debt-ceiling limit,” Gillum said, noting that the U.S. risks running out of enough cash to fund all its obligations in August without a new debt-limit deal. The debt ceiling is the limit placed on the total amount of money that the government is authorized to borrow to meet existing obligations. If Congress fails to increase or suspend this limit, “Treasury won’t have the money to pay its bills,” potentially at some point in August, which could have the most negative impact on bills set to mature that month, the strategist said
Monday’s trading session was relatively quiet due to a lack of major data releases, and appeared to be largely driven by month-end buying that pushed one- BX:TMUBMUSD01Y through 30-year yields BX:TMUBMUSD30Y lower. Meanwhile, all three major U.S. stock indexes DJIA SPX COMP advanced in New York afternoon trading.
According to Tang of Monetary Policy Analytics, “we might be heading into a very choppy period” for the Treasury market.
The recent decline in bond yields gives the Trump administration “a little more wiggle room in terms of financing costs so that if there is a plan to increase borrowing, you could argue that the overall cost could be lower because yields are so low,” Tang said via phone on Monday.
Still, volatility in T-bills can’t be completely ruled out if Trump’s bill is enacted into law. However, “you could convince the market that short-term yields will be lower even with greater supply, while longer-run yields could rise on any loss of Fed credibility or if inflation expectations blow up.”
Read: The wrong kind of Fed rate cuts are coming, says JPMorgan. What that means for stocks, bonds and the dollar.
-Vivien Lou Chen
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06-30-25 1339ET
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