Tag: TBAC

TL;DR

• Jamie Dimon, JPMorgan’s CEO, has warned since at least the 2023 shareholder letter that higher-for-longer rates, war risk, and fiscal deficits could hit assets; the deeper fuse is U.S. debt rollover colliding with persistent Treasury supply and finite balance sheets. [1][2]
• Even with June CPI around 3.5% year over year, the 10-year Treasury hovered near 4.6% in mid-July 2026; that level sits well above the government’s current average interest rate on outstanding debt, implying net interest keeps trending higher as low-coupon notes reset. [3][4][5]
• The 2022 UK gilts shock showed how a long-end spike (30-year yields jumping roughly 130–140 bps in days) can trigger forced selling; the U.S. won’t replay LDI, but heavy funding needs plus convexity and dealer limits can rhyme. [6]

What the source said

In the 2023 JPMorgan shareholder letter, Jamie Dimon flagged persistent inflation, geopolitical conflicts (notably Russia–Ukraine and Middle East hotspots), and fiscal deficits as reasons rates could stay high and markets could see a shock; he argued investors should not assume a smooth disinflation glide path like the mid-1980s. He linked these risks to potential pressure on both equities and bonds if term premia rise and cash flows get discounted at higher rates. He framed bank operating conditions as strong in 2023–2024 but warned they can change quickly if funding costs or credit losses climb. [1]

Why it matters

• Primary dealers in New York, U.S. money market funds, and foreign reserve managers in places like Tokyo and Beijing finance the Treasury’s deficits, while retirees on Social Security and Medicare, and S&P 500 firms rolling debt, depend on the cost of that funding. If “vigilantes” demand more term premium, the 10-year at roughly 4.55%–4.60% in mid-July 2026 can lift mortgage rates, capex hurdles, and equity discount rates even after a soft CPI headline. [3][4]

• Traditional 60/40 allocators, banks’ AFS/HTM books, and long-duration ETFs such as iShares TLT (launched 2002) face path risk that inflation prints alone won’t capture; the UK’s 2022 episode showed 30-year gilts spiking about 130–140 bps within days and forcing deleveraging, while TLT itself lost roughly 31% in calendar 2022 during the U.S. rate shock. [6][7]

Original analysis

Dimon’s “shock” setup rests on rates, geopolitics, and deficits. The common reply says: core inflation is easing, so yields drift lower; flare-ups are priced; deficits matter later. I disagree because the plumbing points to supply, rollover, and balance-sheet constraints that act now.

Contrarian read

• Consensus: Softer CPI = lower yields = duration relief.
• Counter: Supply and rollover are repricing duration irrespective of CPI. June CPI ran near 3.5% y/y while the 10-year sat around 4.6%, and recent Treasury refunding guidance emphasized steady coupon auction sizes over “at least the next several quarters,” a stance that can buoy term premia when dealer capacity is finite. [3][4][8]

Back-of-envelope calculation (rollover wedge)

• Facts:
  • Debt held by the public was roughly $29.7 trillion around late 2025, per Treasury’s Debt to the Penny dataset. [9]
  • The weighted average maturity (WAM) of marketable debt was about 70.8 months (≈5.9 years) as of October 31, 2024. [8]
  • The average interest rate on outstanding Treasury marketable debt ran near 3.4% in 2025–2026 per Treasury’s dataset. [5]
  • The 10-year yield in mid-July 2026 printed around 4.55%–4.60%. [4]
• Mechanics:
  • If WAM ≈ 70.8 months, about 12/70.8 ≈ 17% of the portfolio resets per year.
  • 17% × $29.7T ≈ $5.0T rolling in the next 12 months.
  • Rate gap vs. legacy average cost: 4.60% − 3.40% ≈ 1.20 percentage points.
  • Extra annualized interest from this year’s roll: 1.20% × $5.0T ≈ $60B.
• Interpretation: That is just year one; as more low-coupon notes roll in 2027–2028, the wedge compounds if the 10-year hangs near 4.6%, regardless of monthly CPI noise. [4][5][9]

Historical analogue: UK gilts, September–October 2022

• The “mini-budget” shock was not about surprise inflation; it was about sudden term-premium repricing to fund deficits and hedge leverage, with 30-year yields jumping roughly 130–140 bps in a few days, forcing LDI selling and a Bank of England liquidity backstop. The U.S. has deeper markets and no LDI ubiquity, yet persistent supply plus convexity and dealer VAR limits can still pressure the long end quickly. [6]

A simple 2×2: supply vs. risk capacity

• High supply + thin risk capacity (e.g., big refundings during bank VAR constraints): risk of sharp yield spikes and auction tails.
• High supply + ample risk capacity (e.g., strong dealer balance sheets and risk-on credit): gradual bear steepening.
• Low supply + thin risk capacity: choppy range trading with occasional squeezes; term premium can still stay positive.
• Low supply + ample risk capacity: benign decline in long-end yields; this is the cyclical “soft landing” case and requires deficits to narrow or issuance to skew short.

Named-stakeholder breakdown

• U.S. Treasury: Recent Quarterly Refunding materials and TBAC slides signal maintaining coupon auction sizes and a stable WAM, which keeps a steady duration pipe flowing into a market where dealers must warehouse risk. [8]
• JPMorgan, Goldman Sachs, and Bank of America: Trading desks benefit from volatility, but a violent long-end selloff stresses client collateral, increases margin calls, and can dampen primary issuance in New York and London.
• 60/40 allocators and long-duration ETFs (e.g., TLT): If the 10-year revisits 5% without a growth scare, equity multiples compress while bond NAVs fall—hurting both legs at once; the 2022 TLT drawdown of about −31% shows the convexity bite. [4][7]

One more inconvenient anchor: deficits

• The CBO’s long-term projections show debt held by the public reaching roughly 116% of GDP by 2034 with primary deficits persisting, implying sustained issuance and a positive term premium absent policy changes; this fiscal backdrop amplifies the rollover wedge described above. [2]

What others are missing

Most coverage centers on “inflation vs. the Fed,” but the under-covered angle is the portfolio’s effective reset speed—call it WANRR, the weighted average next repricing rate. Bills and FRNs shorten the government’s true interest-rate sensitivity; TBAC slides show bills plus FRNs comprising roughly the high-30s percent of marketable debt in 2024, far quicker to reprice than 7–10 year notes. That accelerates the pass-through from a 10-year near 4.6% to the average interest rate, which Treasury’s dataset shows climbing as legacy sub-2% coupons from 2020–2021 roll away. [8][4][5][3]

What to watch next

1. By October 31, 2026, the 10-year Treasury yield (FRED series DGS10) records a weekly average at or above 5.00% for at least one week, indicating term premium and supply pressure overcame benign CPI prints. [4]

2. By December 31, 2026, at least one 30-year Treasury bond auction (new issue or reopening) tails by 3.0 basis points or more versus the when-issued yield at the 1:00 p.m. ET deadline, signaling constrained balance-sheet capacity at primary issuance. [10]

3. By March 31, 2027, iShares TLT posts a total return of −10% or worse from the July 15, 2026 close to that date (using NAV total return on the fund’s page), consistent with duration pain despite moderating CPI. [7]

Sources

[1] JPMorgan Chase 2023 Shareholder Letter (Jamie Dimon) — outlines CEO views on higher rates, geopolitics, and market risk, anchoring the “shock” narrative.

[2] Congressional Budget Office — Long-Term Budget Projections — provides deficit and debt-to-GDP trajectories that inform issuance and term-premium pressure.

[3] U.S. Bureau of Labor Statistics — Consumer Price Index — supplies CPI data used for the June year-over-year reading and inflation context.

[4] Federal Reserve Bank of St. Louis (FRED) — 10-Year Treasury Constant Maturity (DGS10) — benchmark for long-end yields and the 4.6% reference point.

[5] U.S. Treasury FiscalData — Average Interest Rates on U.S. Treasury Securities — tracks the average coupon cost on outstanding debt to compare against current yields.

[6] Bank of England — Financial Stability Report, December 2022 — documents the UK gilt crisis mechanics, LDI deleveraging, and yield spike magnitudes.

[7] iShares — TLT (20+ Year Treasury Bond ETF) — provides historical performance and duration metrics to illustrate convexity and drawdown risk.

[8] U.S. Treasury — Treasury Borrowing Advisory Committee (TBAC) Q4 2024 Presentation — shows WAM, issuance mix, and debt composition (bills/FRNs vs. coupons).

[9] U.S. Treasury FiscalData — Debt to the Penny — gives levels for debt held by the public to size the rollover base.

[10] U.S. Treasury — Auction Query (official results) — verifies auction tails and bid metrics for 30-year bond sales.

TL;DR

• Bessent’s Treasury is borrowing at a clip that makes net interest the fastest-growing federal bill, now bigger than year‑to‑date defense outlays—and taxpayers are already footing it [2].
• The real squeeze isn’t “debt apocalypse”; it’s financing mechanics: coupon sizes are frozen into 2026, pushing a refinancing wave into 2027 when rates may still be sticky [3][4].
• Back‑of‑envelope: if 9‑month net interest is $857B, FY2026 likely tops ~$1.14T—about $8.5K per U.S. household—before any new programs, tax cuts, or wars enter the chat [2][10].

What the source said

TheStreet’s piece argues the “troubling news for every taxpayer” is the interest bill itself and points to the CBO’s June 2026 Monthly Budget Review showing a $1.4 trillion deficit for the first nine months of the fiscal year and $857 billion in net interest, roughly $23.8 billion a week and up 13% year over year [1][2]. It notes that total federal debt is near $39.4 trillion and that year‑to‑date net interest has surpassed defense spending in the same period [1][2]. The article references CRFB’s warning that full‑year borrowing could exceed $2 trillion and cites longer‑term CBO projections showing interest costs roughly doubling by 2036, with Social Security’s OASI trust fund projected to hit insolvency in 2032 if laws remain unchanged [1][7][8].

Why it matters

Stakeholders aren’t abstract “taxpayers”; they’re workers whose FICA payroll taxes fund Medicare and Social Security, retirees whose checks depend on the OASI and DI trust funds, and households facing higher “interest taxes” in the form of rising federal carry costs each year [2][8]. The CBO ledger for FY2026 to date shows interest already outruns discretionary fights over EPA, Education, or Commerce; those culture‑war skirmishes won’t reclaim real money if the interest line keeps compounding at a double‑digit clip [2].

Markets, too, have agency. Primary dealers and bond funds absorb the supply that Bessent’s team ships each week via bills, notes, and bonds, and TBAC minutes indicate dealers expect larger coupon auctions in early 2027 [3]. That means price risk today and term‑premia tomorrow, with the bill landing in the public’s lap via higher interest outlays that crowd out choices elsewhere, including discretionary spending in FY2027–2028 [3][6].

Original analysis

• Back‑of‑envelope math

  • Nine months into FY2026, net interest totals $857B. Annualizing: $857B ÷ 9 × 12 ≈ $1.142T for the full year (directionally conservative if rates or issuance tick up) [2].
  • Households: FRED shows ~134.79 million U.S. households in 2025. $1.142T ÷ 134.79M ≈ $8,470 per household in FY2026—pure carry cost, not new services [10].

• Contrarian read

  • Consensus: “Debt is unsustainable; immediate austerity or crisis is inevitable.”
  • Counter: Over the next 12 months, the binding constraint is issuance plumbing, not instant insolvency. Treasury said it will keep note/bond auction sizes steady for “several more quarters,” even as TBAC’s discussion flags a ~$1.3 trillion funding shortfall over FY2027–2028 if current sizes persist [3][4]. Translation: the tough part got kicked into 2027, when terming out becomes unavoidable—and if 10‑year yields stay elevated, coupons will reset higher right as more supply arrives [3][4].

• A named‑stakeholder breakdown

  • Scott Bessent, Treasury Secretary: He is selling into a rising‑rate, deficit‑heavy backdrop with limited levers beyond maturity mix, buybacks timing, and messaging that calms dealers; his “financial literacy” push won’t bend the interest curve, but execution on issuance strategy will [5][6].
  • TBAC (Treasury Borrowing Advisory Committee): Its May 2026 minutes telegraphed that dealers expect larger coupon sizes early 2027; if realized, that locks in more high‑coupon debt and lifts interest costs structurally into the 2030s [3].
  • CBO: It just printed the scoreboard—$1.4T nine‑month deficit, $857B net interest, and interest > defense year‑to‑date; its 10‑year baseline has net interest jumping from roughly $1.0T in 2026 to about $2.1T by 2036 at 4.6% of GDP, surpassing prior peaks [2][8].
  • CRFB (Maya MacGuineas): The outside push to keep borrowing under roughly $2T in FY2026 sharpens the political choice—trim now or accept higher carry costs in 2027–2028 [7].

• Historical analogue

  • In the early 1990s, net interest peaked near about 3.2% of GDP and then ebbed as growth and falling yields did the heavy lifting from 1992 through 2000; CBO now projects roughly 3.3% in 2026 rising toward 4.6% by 2036 [8][9]. The 1990s playbook—grow out and refinance down—rode a secular disinflation tailwind; today’s baseline bakes in higher average rates, so the “grow and roll” cushion is thinner [8][9].

• A simple 2×2: rates path vs. issuance mix

  • High rates + bill‑heavy: Best near‑term auctions, worst pass‑through to interest costs; FY2027 refi pain rises.
  • High rates + term‑out now: Higher coupons today, but reduced refi risk if the Fed eases late.
  • Lower rates + bill‑heavy: Wins everywhere; but you must be lucky on timing.
  • Lower rates + term‑out: Overpays briefly, but stabilizes carry; the conservative CFO’s choice.

Treasury’s current stance—hold coupons steady and lean on bills—prioritizes auction smoothness over long‑run carry, which assumes demand for U.S. duration remains adequate and disinflation continues through 2026 [3][4][6]. If that assumption fails and 10‑year yields hover near recent highs into 2027, taxpayers inherit a bigger, stickier interest bill for years [3][8].

What others are missing

Coverage fixates on the deficit topline. The subtler story is the composition shift underneath: CBO category tables show corporate income tax receipts down about 24% year‑to‑date versus last year due to 2025 law changes that boosted deductions, while individual/payroll taxes carried more weight until a February 2026 court ruling triggered roughly $70 billion in customs refunds that hit net tariff revenue [2]. That cocktail tilts financing toward bills and away from locking in term even as net interest outlays climb 13% year over year through June 2026, raising rollover risk into the 2027 refunding window [2][3].

What to watch next

1. By September 30, 2026, net interest outlays reported in the Monthly Treasury Statement will exceed $1.12 trillion for FY2026 [2].
2. By the February 2027 Quarterly Refunding, Treasury will announce increases to nominal coupon auction sizes (at least the 2‑year and 5‑year tenors), reversing 2026’s “steady for several quarters” guidance [3][4].
3. By June 2027, CBO’s Monthly Budget Review will show corporate income tax receipts at least 15% below the same period two years earlier (June 2025), keeping pressure on bill issuance and net interest [2].

My take

If I ran Bessent’s Treasury, I’d front‑load some pain in 2026—nudge up coupons and lengthen maturities while market depth is intact—rather than gamble on a perfect 2027 [3][4]. The CBO scoreboard says interest is already outrunning defense, and the TBAC roadmap says the real refinance hit is coming within four quarters; trim the bill share, accept a few ugly auctions now, and buy rate insurance before the economy proves sticky [2][3][8]. Pair that with a modest, bipartisan PAYGO rule so new tax cuts or credits don’t feed the interest line. Otherwise households are staring at an $8K‑plus annual “interest tax” with nothing to show for it in FY2026–2027 [2][10].

Sources

1. Bessent’s Treasury has troubling news for every taxpayer — TheStreet (https://www.thestreet.com/taxes/bessents-treasury-has-troubling-news-for-every-taxpayer) — Frames net interest as the taxpayer’s real bill and cites up‑to‑date deficit and debt figures.
2. Monthly Budget Review: June 2026 — Congressional Budget Office (https://www.cbo.gov/system/files/2026-07/61982-MBR.pdf) — Confirms $1.4T nine‑month deficit, $857B net interest (up 13% YoY), and interest outlays surpassing defense year‑to‑date.
3. Minutes of the Meeting of the Treasury Borrowing Advisory Committee, May 5, 2026 — U.S. Treasury (https://home.treasury.gov/news/press-releases/sb0491) — Details dealer expectations for 2027 coupon size increases and a ~$1.3T funding gap under current sizes.
4. U.S. Treasury keeps auction sizes steady; dealers expect change in early 2027 — Kitco News (https://www.kitco.com/news/off-the-wire/2026-05-06/us-treasury-keeps-auction-sizes-steady-dealers-expect-change-early) — Reports on Treasury’s “several more quarters” guidance and market positioning.
5. Bessent wants Americans to avoid easy‑money traps and invest in financial literacy — Washington Post (https://www.washingtonpost.com/business/2026/05/01/bessent-treasury-secretary-profile/) — Profiles Scott Bessent’s agenda and public messaging constraints.
6. Bessent Has Limited Options to Halt Climb in Treasury Yields — Bloomberg News (https://news.bloomberglaw.com/capital-markets/bessent-has-limited-options-to-halt-climb-in-treasury-yields) — Explains rising yields and the narrow toolkit Treasury has to influence them.
7. CBO Estimates FY 2026 Deficit Overtakes 2025, Totals $1.4 Trillion — CRFB (https://www.crfb.org/press-releases/cbo-estimates-fy-2026-deficit-overtakes-2025-totals-14-trillion) — Provides outside analysis warning FY2026 borrowing may exceed $2T.
8. Director’s Statement on the Budget and Economic Outlook: 2026–2036 — CBO (https://www.cbo.gov/publication/62050) — Projects net interest rising from ≈$1.0T in 2026 to ≈$2.1T by 2036, from 3.3% to 4.6% of GDP.
9. An Update on the Federal Budget Outlook (March 2026) — Brookings/TPC (https://www.brookings.edu/wp-content/uploads/2026/03/20260311_TPC_GaleAuerbach_FiscalOutlook_FINAL1.pdf) — Notes the prior historical peak of net interest at ≈3.2% of GDP in the early 1990s.
10. Total Households (TTLHH) — FRED, St. Louis Fed (https://fred.stlouisfed.org/series/TTLHH/) — Supplies the ≈134.79 million household count used for per‑household cost estimates.