Many investors and traders believe that more Fed demand for short-term debt would give Mr Bessent the opportunity to issue more Treasury debt in the form of Treasury bills. The yield curve, which plots bond rates at different maturities, is sloping upwards again: one-month Treasury bills yield 3.6% while 30-year bonds yield over 5%, so money can be saved by pivoting from long- to short-term debt. Mr Bessent’s interest in stablecoins as a source of demand for short-term Treasuries also indicates that he would be happy to increase the supply of bills. Buying shorter-term debt would help to avoid the risk of gigantic losses like the Federal Reserve inflicted on itself in the aftermath of the pandemic. Its quantitative-easing programme in effect borrowed short by creating interest- paying reserves owed to commercial banks, while at the same time lending long, by buying long-term Treasuries. When interest rates surged, the value of its bond portfolio holdings plunged, while the Fed suddenly owed more interest to the banks it had borrowed from. But a pivot to short-term financing would carry risks for Mr Bessent too. For one, letting longer-term Treasury debt held by the Fed mature without replacing it will probably raise the crucial ten-year Treasury yield, the most monitored benchmark in the world for long-term interest rates. The rates of interest on America’s 30-year mortgages are driven by the ten-year Treasury yield. Mr Bessent would struggle politically with any accord that is seen as raising costs for homeowners. A shorter-term borrowing schedule also means that far larger quantities of debt must be issued at regular intervals, raising the stakes during any moment of funding stress. And if a lot of government debt is funded with Treasury bills, any increase in interest rates feeds through immediately into interest payments. That rollover risk would expose the federal government to much larger payments if rates rise suddenly. Peter R. Fisher, who served as a Treasury official between 2001 and 2004, shares the sceptical view of the Fed’s humongous balance-sheet held by Mr Bessent and Mr Warsh. But he is more concerned about the continued drift towards short-term borrowing under Mr Bessent. “He’s got a very short horizon. You can tell he’s a former hedge-fund guy,” Mr Fisher says,
referring to a propensity at hedge funds to take gambles. Doing that with investors’ cash is one thing—with America’s safest asset, quite another.■ This article was downloaded by zlibrary from https://www.economist.com//special-report/2026/06/01/partners-in-prime-the-fed-and- treasurys-new-relationship
Neither banks nor stablecoins will rescue the Treasury market More involvement from banks and crypto firms in the Treasury market is a good thing. Neither will outrun immense issuance June 4th 2026 “YOUR PIPELINE”, according to a popular saying in the sales industry, “is your lifeline.” The debt managers responsible for issuing Treasuries might not like to associate themselves with cold-callers. But with some once- reliable buyers of Treasuries no longer behaving so reliably, the task of searching for alternative customers is an increasingly vital one. There are two types that optimistic boosters in the Trump administration hope will get more active: crypto-bros in khaki shorts and bankers in pinstripes. Both would help increase demand for Treasuries and potentially
make the market function better—though they would do neither in world- changing proportions. Take the crypto-bros first, who bring stablecoins to the table. Stablecoins are crypto assets pegged to a certain value—usually one-to-one with the American dollar. The GENIUS Act, passed by Congress last year, laid out who can produce them and what they can be used for. Crucially, the law requires that stablecoins be backed by a fully matching amount of short-term Treasury debt, maturing in less than 94 days. The asset class has taken off quickly, more than doubling in size to $325bn in the past two years (see chart). Tether, the biggest stablecoin, holds $117bn in Treasuries; if it were a country, it would be the 18th-largest national holder of American debt, ranked between South Korea and the United Arab Emirates. Some policymakers, not least Scott Bessent, the treasury secretary, believe that continued rapid growth could make the coins an important source of demand for Treasuries. In November Mr Bessent suggested that the stablecoin market could grow tenfold by the end of the decade, driving demand for Treasury bills. Standard Chartered, a bank, is even more bullish, predicting the market will grow to $2trn in less than two years. That kind of growth would spur some
$1trn in additional demand for Treasury bills (not $2trn, since some of the gusto for stablecoins would probably eat into other sources of demand, such as money-market funds). That, along with a potentially greater appetite from the Federal Reserve (see previous story), would allow the Treasury to issue a far larger portion of its debt as bills, reducing issuance of longer-dated bonds and so lowering average yields. But there is ample reason for scepticism. JPMorgan Chase, another bank, believes stablecoin growth will be much slower. It sees a market of $500bn- 750bn as more plausible by the end of 2027. Indeed, since the end of October stablecoins’ march has slowed almost to a standstill, with growth of less than 5%. That coincides with a slump in riskier crypto assets such as bitcoin. A similar pattern held between 2022 and 2024, when the stablecoin market actually shrank in size during another slump in crypto prices— reinforcing a perception of stablecoins as merely a vehicle for crypto investment. Indeed, without a recovery in crypto prices, even the pessimistic forecast for stablecoins (doubling by the end of next year) may prove too lofty. Banks are an old source of demand for Treasuries that are making a comeback. They had been declining as players in the Treasury market since just after the global financial crisis, when Congress and regulators, keen to prevent more banks from going belly up, made it harder for them to grow their business—including trading or lending against American government debt. Now policymakers lament that such rules shifted systemic risk elsewhere: when banks retreated, worryingly indebted investors stepped forward. Loosening restrictions on banks would allow them to return to their previous role as the market’s middlemen. In November, American regulators agreed to reduce a particular capital requirement for banks, known as the enhanced supplementary leverage ratio. That move enabled banks to hold (and buy and sell) more low-risk assets like Treasuries. In anticipation of the change (which took effect in April) banks’ activity in the market has climbed. Dealer holdings of Treasuries—the bonds held by banks in their role as market-makers, rather than for their own portfolios— had already increased from around $200bn at the end of 2021 to $542bn at
the end of 2025. The new demand is welcome, but even more important is the fact that banks may now be more willing to trade through a crisis, keeping the market liquid. More deregulation is on the way. Banks have won significant changes to the American implementation of Basel III, a package of international-banking regulations, and to the rules for the very largest lenders, known as globally systemically important banks. Those rules will be steadily loosened over the years to come, allowing banks to hold more assets without incurring a capital penalty, and enabling them to trade more actively in the Treasury market. But banks are still unlikely to fulfil the role they once did, because the scale of the task has outgrown them. At the end of 2008, large commercial banks in America boasted total assets of $8trn, compared with a federal debt of roughly $6trn. By the end of 2025, bank assets had grown by around 80%, to a little less than $15trn, whereas the federal debt had ballooned by 380%, to a little more than $30trn. With such a mountain of debt, there are no new buyers or intermediaries, not even banks, who can reasonably keep up. ■ This article was downloaded by zlibrary from https://www.economist.com//special-report/2026/06/01/neither-banks-nor-stablecoins- will-rescue-the-treasury-market
Could something replace the Treasury market? The alternative assets are too small, fragile or limited in nature to match the usefulness of American debt June 4th 2026 There is no iron law dictating that the world’s reserve asset be Treasury bonds. For centuries British gilts held that crown, until they were dethroned after the second world war. But there is no successor to Treasuries. The potential heirs lack size and other crucial features. Since its construction in 1999, the euro zone has always been the most likely contender. But the European sovereign-debt crisis in the early 2010s blew up the long-term bond yields of countries like Greece, Italy and Spain. More recently, the European Commission has started issuing debt. But these bonds do not yet meet the needs of investors even in Europe, much less
globally. For one thing the market is far too small. The commission plans to issue €100bn ($116bn) in long-term debt in the first half of the year, compared with the $2.2trn planned by the Treasury Department. More importantly, the bonds do not behave like assets backed by the combined heft of a European superpower, but ones issued by a supranational institution without tax-raising powers, supported by a varied group of sovereign creditors. As a result, the ten-year European Commission bond offers a yield of around 3.5%, meaning investors treat it as riskier than the bloc’s most creditworthy governments (the yield on German government debt is 3%). The market is not ready to buy a European story of political unity. The Treasury market is now concerningly large, but others are too small to compete. There are nine remaining nations with triple-A ratings from each of the three major ratings firms. The list includes Germany and a handful of thrifty northern European members of the euro zone, Australia, Canada, Singapore and Switzerland. Combined, their total government debt runs to around $7trn, less than a quarter the size of the Treasury market (see chart). Gold, the favoured asset of panicked central banks, has few of the properties that are so valuable in Treasuries. Investors collect no interest income from a