The U.S. Treasury Yield Curve: How Issuance Is Warping Global Markets

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For decades, the U.S. Treasury yield curve has been the foundation of global finance. Its slope captured growth, inflation, and sentiment—and condensed them into a single line. Policymakers, corporations, and investors alike treated it as gospel. Steep meant expansion. Inversion warned of recession. That compass is broken. The reason isn’t just Washington’s $2 trillion deficits—it’s how those deficits are financed. Since taking office in 2021, Treasury Secretary Janet Yellen leaned heavily on short-term borrowing, particularly the 2-year note.¹ Auction sizes swelled, turning the 2-year into the centerpiece of deficit financing. That choice created structural fragility. By 2025, ~$5 trillion of Treasuries will mature within two years.² That means the U.S. must constantly roll over vast sums at prevailing market rates. With real rates now higher, every refinancing compounds the burden. What looked manageable on paper has become a rollover trap. To cope, the Treasury continues to flood the short end of the curve, pinning 2-year yields with supply. It also leaned on long-dated issuance to “lock in” costs. That flattens the back end. The result is a yield curve shaped not by economic fundamentals, but by near-term funding decisions. The danger is that this flood of issuance could eventually overwhelm the market’s absorption capacity. If buyers balk—or demand punishing concessions—the Treasury may be tempted to take the next step: imposing its own version of yield curve control. Unlike Japan’s explicit caps, this would be dressed up as “debt management.” But the effect would be the same—markets sidelined, signals suppressed, and credibility eroded. The IMF has already warned that “excessive Treasury issuance, particularly in short maturities, risks overwhelming market absorption capacity, distorting yields and eroding the curve’s signaling function.” (IMF staff commentary, 2025) Bottom line: the yield curve, once the most trusted signal in markets, is now being gamed by supply—and risks being formally controlled if the supply/demand balance breaks down.

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Implicit Yield Curve Control

Yield Curve Control (YCC) is a policy in which a government or central bank deliberately caps or targets certain bond yields, committing to intervene as needed to enforce those levels. Most often, this is done through large-scale bond buying to prevent yields from rising. Japan is the textbook case: since 2016, the Bank of Japan has pledged to purchase unlimited 10-year government bonds to keep yields near zero.³ But YCC can also work in the other direction. Authorities can sell or issue debt to prevent yields from falling too far. In that sense, YCC is about controlling the curve’s shape—whether by buying or selling—rather than letting market forces set rates. In the U.S., YCC is not an official policy, but Treasury’s issuance strategy has created a form of implicit YCC. Instead of intervening in the secondary market, Treasury is shaping yields through the size and maturity mix of its auctions.

• Supply deluge: In 2024 and 2025, Treasury issuance exceeded $2 trillion per year; debt held by the public is near $30 trillion.⁴ The average maturity is around 72 months, and a large slice—roughly a third—matures within 12 months.
• Long end: Recent refundings have kept coupon auction sizes steady while Treasury leans more on bills and expands buybacks, functionally steadying the back end of the curve.
• Short-end pressure: At the same time, the Treasury has saturated the market with T-bills and 2-year notes—auction sizes for the latter reached about $69 billion per month by mid-2025 (U.S. Treasury, Auction Data, July 2025). The effect is unmistakable: yields are being driven by supply mechanics, not fundamentals. As JPMorgan observed in its Global Markets Strategy Report (July 2025), “The sheer volume of Treasury issuance is reshaping market dynamics, forcing yields to reflect supply pressures rather than economic fundamentals.” (JPMorgan Global Markets Strategy, Jul 2025) Goldman Sachs echoed the point in its Fixed Income Outlook (August 2025): “The Treasury’s bias toward longer-dated issuance is effectively anchoring the back end of the curve, creating a disconnect with economic realities.” (Goldman Sachs Fixed Income Outlook, Aug 2025) That’s why today’s curve is dangerous: it signals funding stress, not growth, inflation, or risk appetite. When the 10-year yield sits at 4.5% despite debt-to-GDP ~120%, that's the byproduct of implicit yield curve control through issuance.

In practice, treat the curve as a policy artifact—not a macro forecast.

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Misleading Data, Misguided Policy

Policy is being set for an economy that looks healthier on paper than in reality—and much of that illusion comes from flawed data.

• CPI shelter survey vs. actual rents rolls of current tenants: As of August 2025, BLS shelter is running about ~3.6% year-over-year, while private rent gauges show negative year-over-year prints through mid-2025.⁵ Properly weighting market rent trends points to materially lower true inflation than headline shelter implies.
• Birth/Death & revisions: From April–December 2024 the Birth/Death model cumulatively added ~1.10 million jobs (~123k/month). BLS’s preliminary benchmark revision (Sept. 9, 2025) indicates ~911,000 fewer jobs between April 2024 and March 2025 than initially reported.
• Establishment vs Household survey divergence: In February 2025, the establishment survey claimed +151,000 jobs added, while the household survey showed a loss of ~588,000.⁶ Discrepancies of this magnitude make clear that multiple measures, or underlying data, are telling very different stories. Taken together, they give policymakers a false sense of strength. Inflation appears stickier. Job growth appears steadier. The Fed, responding to these headline numbers, keeps rates higher than is warranted—tightening financial conditions in an economy already weakening. The yield curve distortion from Treasury issuance compounds this mistake. Rates are being held high not because the economy demands it, but because data mis-measurement and issuance distortions leave little cushion for error. If markets had better visibility—true rents, real job gains—I believe rates would already be lower.

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The 2-Year Rollover Trap

The heaviest distortion comes from Treasury’s overreliance on the 2-year note. By mid-2025, monthly 2-year auctions will have swelled to $70 billion, up from $60 billion in 2023, making the 2-year the workhorse of deficit financing.⁷ This overconcentration wasn’t accidental. It was the result of Treasury Secretary Janet Yellen’s short-sighted strategy of leaning on the 2-year as her go-to instrument to fund $2 trillion annual deficits. By pushing so much issuance into this narrow maturity window, Yellen saddled the Treasury with a massive $5 trillion rollover burden—debt maturing within 24 months that must be continuously refinanced. That burden now falls on Treasury Secretary Scott Bessent. Unlike Yellen, Bessent has no luxury of rolling debt at ultra-low rates. Instead, he must refinance this mountain of short-term paper at much higher real interest rates, which magnify the fiscal cost and further destabilize the curve. In effect, the rollover trap is a structural time bomb handed off by Yellen, one that Bessent must now attempt to defuse under far less favorable conditions. The consequences cascade through the curve:

• Front end: 2-year yields mirror auction supply and rollover pressure, not policy odds.
• Belly: Saturation pulls 3s–5s higher, steepening short-to-belly for the wrong reasons.
• Long end: Steady coupons and buybacks mute term premia and mask fiscal risk. Barclays put it bluntly in its Fixed Income Research Note (June 2025): “The Treasury’s heavy issuance of 2-year notes is a deliberate tactic to manage funding costs, but it’s creating a rollover crisis that distorts the yield curve.” (Barclays Fixed Income Research, Jun 2025) The rollover burden also magnifies systemic risk. Each refinancing exposes Treasury—and by extension, global markets—to shifts in investor appetite. A failed or weak 2-year auction would ripple through repo markets, push up short-term funding rates, and destabilize risk assets. The 2-year has become the single point of failure in the curve. In short, Yellen created the fragility; Bessent must live with it. The result is a yield curve that isn’t just inverted—it’s brittle, prone to shocks, and no longer a reliable economic signal.

As a result, the front end is the market’s single point of failure; watch 2-year auction cover/tails and repo for stress.

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Distortions Ripple Across Markets

When the curve stops functioning, the damage doesn’t stay confined to Treasuries. The distortions bleed into every asset class priced off the curve—corporate bonds, mortgages, and equities.

• Forward rates: Once reliable predictors of Fed policy, they are now misaligned, reflecting issuance pressures rather than actual monetary policy trajectories. Investors who rely on forwards to hedge interest-rate risk are increasingly misled.
• Corporate bond spreads: Spreads are now among the tightest in more than 15 years, despite weakening fundamentals. BBB corporates are trading as if default risk is negligible, even as cash flow coverage erodes. The illusion of stability comes from a curve that understates risk and from equity markets buoyed by overstated BLS data.
• Equity valuations: Stock markets are pricing in an economy that looks stronger on paper than in reality. BLS headline payroll data—padded by the Birth/Death model and later revised away—have lulled equity investors into believing job growth is robust and recession risk is low. As a result, risk premia across equities and credit are artificially compressed. As Robert & Joshua Barone wrote in their June 25, 2025 VettaFi piece, “The Stone Age of Economic Reporting,” (VettaFi, Jun 25, 2025) the flaws in official data—from phantom jobs to lagging shelter inflation—paint a false picture of economic resilience. Equity markets have latched onto these numbers, extrapolating strength that doesn’t exist. This false sense of security cascades into credit markets. If equities appear strong, spreads stay tight. If spreads are tight, investors assume systemic risk is low. Yet the foundation for this optimism is fraudulent in nature—phantom jobs and lagged inflation prints that mask consumer stress and weak growth. As Mohamed El-Erian warned (Bloomberg Opinion, June 10, 2025), “When the yield curve stops reflecting market expectations, it undermines every pricing model that depends on it, from mortgages to equities.” (Bloomberg Opinion — Mohamed El-Erian, Jun 10, 2025) Today, that breakdown extends further: bad economic data is reinforcing bad signals, leaving investors with models that are systematically miscalibrated. The result is a market where risk is profoundly mispriced. Stocks are priced for resilience. Bonds are priced for stability. Spreads are the tightest in over a decade. Yet beneath the surface, the economy is far weaker than headline data imply, and the curve no longer provides a reliable compass. This is how fragility builds—quietly, invisibly, until a stress event forces repricing all at once.

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Liquidity Flashing Yellow

Liquidity strains are another flashing warning light. One of the clearest signals is coming from the Federal Reserve’s Overnight Reverse Repurchase Facility (RRP).

The RRP is a tool the Fed uses to manage short-term rates and absorb excess liquidity. Money funds, GSEs, and banks park cash overnight at the Fed in exchange for Treasuries and earn a risk-free return. When system-wide liquidity is abundant, usage of the RRP rises as institutions look for safe parking. When liquidity tightens, balances fall as cash is redeployed into higher-yielding assets or disappears from the system entirely. m the system entirely.

At its peak in late 2022, the RRP absorbed $2.6 trillion of excess liquidity.⁸ By August 2025, balances had collapsed to near zero, reflecting two powerful forces:

1. Quantitative Tightening (QT): The Fed has shrunk its balance sheet to $6.7 trillion (H.4.1 release, August 29, 2025), draining reserves from the banking system.
2. Treasury issuance at the short end: Money market funds are shifting cash from the RRP into T-bills, which now yield more than the Fed’s reverse repo rate thanks to Treasury’s flood of short-term issuance.

On the surface that looks orderly. In reality it’s a warning: the excess-liquidity cushion that once insulated the system is gone.

This shift has knock-on effects:

• Dealer capacity: Regulatory constraints like Basel III leverage ratios limit how much balance sheet space primary dealers can devote to absorbing Treasury supply. Without the RRP buffer, these constraints bite harder.
• Collateral shortages: With on-the-run Treasuries hoarded, repo markets are experiencing collateral scarcity. That drives volatility and spikes in repo rates, especially around quarter-ends when balance sheets are tightest.
• Fragility in funding markets: Rising repo volatility and a drained RRP mean the financial system is more vulnerable to shocks. A poorly bid Treasury auction or a sudden funding squeeze could ripple across markets faster than in prior cycles.

As JPMorgan's Teresa Ho put it, "the magnitude somewhat caught us off guard," after SOFR (Secured Overnight Financing Rate) briefly traded above IORB (the Fed’s interest on reserve balances rate) around settlement and tax dates. (Reuters, Sep 15, 2025)

In short: the RRP once acted as a shock absorber. That shock absorber is now gone. With liquidity tight, dealer balance sheets constrained, and Treasury supply unrelenting, the system is flashing yellow for funding stress.

With the RRP buffer gone, stress migrates to repo and dealer balance sheets—expect episodic squeezes around settlements and quarter-ends.

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Waning Foreign Demand

Foreign sponsorship is no longer the backstop it once was.

• Japan remains the largest holder, but it has been forced into episodic sales to defend the yen. Rising JGB yields make Treasuries less compelling, and when stress hits, Japanese institutions sell what has the most price stability and liquidity: U.S. Treasuries. That very characteristic—Treasuries as the world’s “safe asset”—ironically makes them the first to be liquidated when foreign investors need to raise cash quickly.
• China has steadily reduced holdings, trimming $57 billion in 2024 to stabilize at $756 billion, while simultaneously boosting gold reserves to over 2,299 tons.⁹ That’s not diversification—it’s a deliberate move away from dollar assets. Beyond yield competition, a deeper issue looms: the weaponization of the dollar. Over the past decade, the U.S. has increasingly used the dollar-based financial system—particularly the SWIFT payments network—as a geopolitical tool, cutting off adversaries and sanctioning sovereign reserves. For allies and rivals alike, this has raised an uncomfortable question: if Treasuries can be frozen, are they still “risk-free”? Russia’s experience after the Ukraine invasion, when roughly $300 billion of its foreign reserves were immobilized, was a watershed moment. The message to other nations was clear: U.S. Treasuries carry not just market risk, but political risk. China’s pivot into gold and alternative settlement systems, and even conversations within the BRICS bloc about non-dollar trade invoicing, are direct responses to this. Eroding foreign demand shifts more burden to domestic institutions already stretched by regulation. Every new auction strains the balance further. The more the dollar is used as a tool of policy rather than as a neutral reserve asset, the more foreign buyers will hesitate to underwrite Washington’s borrowing needs.

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Market Microstructure Under Stress

Primary dealers—once dependable shock absorbers—are showing cracks. The mechanics of Treasury auctions tell the story:

• Bid-to-cover ratios, which measure overall demand relative to supply, have slipped toward multi-year lows, signaling waning investor appetite.
• Auction “tails”—the gap between the average accepted yield and the pre-auction market level—have widened, showing investors are demanding higher yields to take down supply.
• Bid-ask spreads in secondary markets, normally razor thin for Treasuries, have widened, reflecting reduced liquidity and higher execution costs. Together, these stresses show the world’s deepest government bond market is no longer absorbing issuance smoothly. The Federal Reserve Bank of New York highlighted the issue in its Primary Dealer Statistics (July 2025): “Auction tails and reduced bid-to-cover ratios reflect increasing difficulty in distributing supply, particularly at the 2-year maturity, where rollover volumes remain unprecedented.” (FRBNY Primary Dealer Statistics, Jul 2025) This isn’t a healthy, liquid market digesting supply. It’s a market where issuance dictates yield levels. That is implicit yield curve control, and it undermines price discovery at the very core of global finance.

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Conclusion: A Hall of Mirrors

The U.S. Treasury yield curve was once the world’s most trusted economic signal. Today, it is a hall of mirrors—warped by debt issuance, distorted by rollover burdens, and undermined by waning global confidence. While debt management, not fundamentals, dictates yields, the curve isn’t a trustworthy compass. Mispricing isn’t an anomaly; it’s the baseline. And because so much of global finance rests on Treasuries and the dollar, these distortions pose risks far beyond U.S. borders. Increasingly, market observers see yield-curve control not as theoretical but as increasingly likely. As markets grow uneasy with rising long-term Treasury yields and persistent funding pressures, the case for the Fed or Treasury stepping in grows stronger. A recent Reuters Breakingviews commentary (September 12, 2025) frames it bluntly: “As market jitters push up the federal government’s borrowing costs, the pressure to implement YCC will increase.” (Reuters Breakingviews, Sep 12, 2025) In other words, the supply deluge and rollover burden created under Yellen’s tenure are forcing Bessent’s Treasury into a corner. Either costs keep rising—risking disruption—or policy finds a way to cap yields more explicitly. If YCC becomes more prevalent, the effect will be profound: thinner price discovery, compressed risk premia, distorted forward curves, and a dollar under even greater political scrutiny. In that scenario, what markets take for granted—their ability to price inflation expectations, growth risk, or credit risk—will be called into question. Yield curve control is ceasing to be a distant possibility; it is the next logical policy pivot in a system stretched to its limits.

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