Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the US Treasury Borrows Trillions Like Clockwork
Transcript
- Lucas: Every quarter, the US Treasury announces how much it plans to borrow over the next three months. For the current quarter ending in June 2026, that number is roughly $850 billion in net new debt. Luna: And that's just the new borrowing — not counting the rollover of maturing debt. So the gross issuance is even higher. Lucas: Right. Gross issuance this quarter is over $2 trillion when you include T-bills, notes, and bonds coming due. The Treasury has to auction new securities to replace them. And it does this like clockwork. Luna: Like clockwork — I think that's the part most people miss. There is a published schedule. Everyone knows when the auctions will happen. Lucas: Exactly. The Treasury publishes a quarterly refunding statement, usually the first week of February, May, August, and November. That statement lays out the auction dates for the next three months. So if you're a primary dealer, you know that the 10-year note will be auctioned on the second Wednesday of every month except maybe January or July. Luna: And 'primary dealer' — that's a specific set of banks and broker-dealers that the Fed authorizes to bid directly at Treasury auctions. There are about 24 of them right now. Lucas: Right. Firms like JPMorgan, Goldman Sachs, Citigroup, Morgan Stanley — they're required to participate in every auction. They make markets in Treasuries. In exchange, they get exclusive access to the auction and the ability to trade directly with the Fed's trading desk. Luna: So how does an auction actually work? Let's say the Treasury wants to issue $40 billion in 10-year notes. Lucas: The Treasury announces the auction a few days in advance — the so-called 'announcement date.' On that day, they release the exact amount, the maturity date, the CUSIP number. Then for the next couple of days, the when-issued market opens up. Luna: When-issued — that's trading for securities that haven't been issued yet. So you can buy or sell the 'when-issued' 10-year note before the auction even happens. Lucas: Yes. And that when-issued trading gives everyone a sense of where the yield is going to settle. Primary dealers and investors use that to decide what to bid. Then on auction day — say 1:00 PM Eastern for notes — bids come in. Luna: Two types of bids: competitive and noncompetitive. Noncompetitive bidders agree to accept whatever yield the auction sets. They get the full amount they want, but only up to $10 million per auction. That's how individual investors buy Treasuries directly through TreasuryDirect. Lucas: Competitive bidders — mostly primary dealers, hedge funds, pension funds — they specify the yield they're willing to accept. The Treasury then sorts all competitive bids from lowest yield to highest. It accepts bids starting from the lowest yield until it fills the entire auction amount. The highest accepted yield becomes the 'stop-out yield.' Everyone who bid at or below that yield gets filled at that stop-out yield. Luna: So it's a uniform-price auction — also called a Dutch auction. All successful bidders pay the same price, even if they bid a lower yield. Lucas: That's the key feature. It encourages bidders to bid aggressively because they know they won't get penalized for bidding low. If it were a discriminatory auction where you pay what you bid, everyone would shade their bids higher. Luna: And what happens if there aren't enough bids? That's called a 'failed auction' — I think it's only happened once in modern history. Lucas: The last time a Treasury auction failed to get enough bids was in 1974. Since then, the Treasury has had to rely on the 'when-issued' market and the primary dealer obligations to guarantee demand. But there's a more subtle risk: a 'tail.' Luna: A tail is when the stop-out yield is significantly higher than the when-issued yield right before the auction. That signals weak demand. The Treasury had a few tails in 2023 when the market was volatile. Lucas: Right. In November 2023, the 30-year bond auction had a tail of over 5 basis points. The market took it as a warning sign. Yields spiked. The Treasury had to pay up because buyers wanted higher compensation. That's the feedback loop: weak auction demand pushes yields up, which makes borrowing more expensive for the government. Luna: And that's why the Treasury is so careful about the auction calendar. They don't want to surprise the market. They try to issue evenly across maturities so that demand stays stable. Lucas: Exactly. The Treasury Borrowing Advisory Committee — a group of primary dealers and investors — meets quarterly to advise on the optimal mix of bills, notes, and bonds. They think about things like the average maturity of the debt, refinancing risk, and investor demand. Luna: So the whole system is designed to make the world's largest borrower look boring. And it mostly works. Lucas: Mostly. But there's a growing concern about the size of the debt. In 2020, the debt to gdp ratio hit 100 percent for the first time since World War Two. It's now around 120 percent. Some economists worry that at some point, buyers will demand higher yields — or stop buying altogether. Luna: Which brings us to the buyer base. Who actually holds all this debt? Foreign governments, the Fed, mutual funds, pension funds, banks, and individuals. Lucas: Japan is the largest foreign holder with about $1.1 trillion as of early 2026. China has cut back — they're down to around $800 billion from over $1 trillion a decade ago. The Fed at one point held over $5 trillion in Treasuries during quantitative easing, but they're letting those roll off now. Luna: And domestic investors — especially retirement funds — are steady buyers. They need safe, liquid assets to match long-term liabilities. Lucas: So the mechanics are solid. But the growing supply is a long-term challenge. The Treasury keeps issuing more, and at some point, someone has to absorb it. If demand doesn't keep up, yields rise, and the cost of servicing the debt goes up. Luna: And interest payments are already the fastest-growing part of the federal budget. Last year, net interest costs were over $900 billion. Lucas: Right. That's more than defense spending. So the Treasury's clockwork borrowing machine works beautifully in normal times, but it also locks in future costs. Every auction today sets the interest payments for years to come. Luna: Honestly, if understanding how the Treasury borrows trillions of dollars every quarter made something click for you, that kind of clarity is exactly why listener support matters. This show stays free and ad-free thanks to people who find this stuff worth a coffee. If today's episode was worth it to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: It's a small gesture that keeps us independent. We don't run ads, so listener contributions are what make this possible. And we appreciate every single one. Luna: Yeah, it really helps. So back to that growing debt pile — I think the next question is what happens if the buyer base shifts dramatically. For instance, if foreign central banks start selling in a coordinated way. Lucas: That's a scenario the Treasury plans for. They have contingency tools: they can shorten the average maturity of new debt to attract more demand, or they can issue floating-rate notes that are less sensitive to rate changes. The Fed could also step in with emergency purchases, though that's politically sensitive. Luna: But for now, the system hums along. Every Tuesday, Thursday, and most Wednesdays, an auction happens. The bids come in, the stop-out yield is set, and the Treasury gets its money. Lucas: It's a remarkable piece of infrastructure. And it's so routine that most people never think about it — until the day it isn't.