A note from TD argues that U.S. debt levels are poised to surge, raising long-term concerns for Treasury markets.
TD analysts say that the U.S. federal government’s structural deficits are projected to drive its debt-to-GDP ratio to 100% in 2024 and 122% by 2034. This steep rise translates to an estimated $22 trillion—or 85%—increase in the supply of U.S. Treasuries over the next decade.
While financial markets absorbed a wave of Treasury issuance in 2020-2021 with ease, thanks to the Federal Reserve’s quantitative easing (QE) program, the shift to quantitative tightening (QT) has reshaped the demand landscape. The Fed’s withdrawal from Treasury purchases has left domestic investors to shoulder the bulk of new issuance, as foreign buyers have largely refrained from stepping into the breach.
Private U.S. investment funds are now nearing the point of replacing foreign investors as the largest holders of U.S. Treasuries, reflecting a significant shift in market dynamics. Although demand at Treasury auctions remains stable, the rising term premium—now at its highest in a decade—suggests investors are demanding greater compensation to hold government debt.
The reserve currency status of the U.S. dollar continues to underpin global demand for Treasuries, yet analysts warn that persistently higher deficits and increasingly price-sensitive buyers could lead to elevated market volatility and upward pressure on interest rates in the years ahead.
This evolving landscape underscores the challenges facing U.S. fiscal and monetary policymakers as they navigate a new era of heightened debt issuance and shifting investor priorities.