Rising expectations of Federal Reserve interest rate hikes have caused a sharp jump in short-term US Treasury yields, leaving Bessent facing a dilemma in debt management.

Bloomberg View columnist Jonathan Levin wrote that as the Federal Reserve resumes interest rate hikes, the U.S. Treasury market has shifted from previous concerns about fiscal deficits and long-term debt supply to pricing in expectations of prolonged high interest rates. Since Fed Chair Powell’s hawkish speech at Jackson Hole in late August, real yields on U.S. 2-year and 5-year Treasury Inflation-Protected Securities (TIPS) have risen by roughly 57 and 64 basis points respectively, indicating that the recent rise in U.S. Treasury yields largely reflects higher real rate expectations rather than a significant deterioration in inflation expectations. Since September, the yield on the 2-year U.S. Treasury has climbed by around 55 basis points, and the spread between 10-year and 2-year Treasury yields narrowed to roughly 17 basis points at one point, its lowest level since early 2025. Markets currently assign a roughly two-thirds probability to another Fed rate hike in October, and have priced in at least three 25-basis-point rate increases over the coming year. Meanwhile, the Fed’s continued rate hikes have created new pressure for U.S. Treasury Secretary Scott Bessent in managing the nation’s debt. The U.S. Treasury has previously relied heavily on short-term T-bills for financing and expanded its long-term Treasury repurchase operations to improve liquidity in the long-term bond market. Levin argues that this approach helps delay locking in higher long-term financing costs, but if the Fed keeps raising rates, frequent rollovers of short-term debt will also push up the government’s interest expenses. The Treasury thus faces a trade-off between extending debt maturities in the high-rate environment and continuing to rely on short-term financing, with the next quarterly refinancing plan set to be announced on November 4.