The International Monetary Fund (IMF) warned on Wednesday that the expanding scale of US government debt issuance is eroding the premium historically enjoyed by US Treasury bonds, which will have repercussions for government securities worldwide.

In its latest Fiscal Monitor report, the Washington-based institution stated: "Increased supply of US Treasury securities is compressing the safety premium they have traditionally commanded. This narrowing of the premium is raising borrowing costs globally."

The United States has been issuing debt on a large scale for some time, as its budget deficit has averaged about 6% of GDP over the past three years. Historically, this represents a substantial gap, except during periods of war or economic recession. According to the Congressional Budget Office, this gap is projected to remain near that level for the next decade.

The IMF highlighted that the narrowing spread between yields on AAA-rated corporate bonds and US Treasury securities is a sign of diminishing appeal for US government debt.

"A narrower spread implies that the premium investors pay for the safety and liquidity of US Treasuries, relative to high-grade corporate bonds, is being compressed," the Fund said. A chart provided by the institution showed that the AAA corporate bond spread had narrowed from over 55 basis points in early 2019 to approximately 35 basis points.

Another risk identified by the IMF is the US Treasury's increasing reliance on short-term debt issuance. Former US Treasury Secretary Scott Bessent stated last year that expanding long-term bond issuance was not justified, given that yields on longer-dated bonds were higher than those on Treasury bills with maturities of one year or less.

The agency pointed out that the US, along with several other governments, has shifted towards greater reliance on Treasury bill issuance, adding: "When debt is concentrated at shorter maturities, governments must refinance more frequently, increasing their exposure to sudden shifts in market conditions or investor sentiment."

These warnings come three weeks before the US Treasury, now led by a new Secretary, is set to announce its latest borrowing plans in the quarterly refunding statement.

The IMF also noted that hedge funds are playing an increasingly significant role in the US Treasury market through so-called cash-futures basis trades, which represents another risk.

"The liquidity provided by hedge funds through such trades may be prone to rapid withdrawal, as it is backed by more highly leveraged investors: a spike in volatility or funding costs could trigger forced unwinding, exacerbating price dislocations," the agency stated.

**Sudden Repricing**

The IMF indicated that several factors—record-high financing needs, a shift in US Treasury demand towards hedge funds, and growing reliance on short-term securities—are increasing vulnerability to a "sudden repricing" in the market.

These dynamics could also become self-reinforcing, the agency suggested.

"If investors begin to worry about a country's rollover capacity, they may demand higher yields or withdraw from sovereign bond auctions altogether, thereby validating the initial concerns," the IMF said. It also noted that "political pressures arising from higher debt servicing costs can themselves become a source of uncertainty and be reflected in market prices."

Meanwhile, the IMF also warned that conflict in the Middle East could introduce new fiscal pressures, forcing governments to choose between supporting their economies against rising energy costs and controlling borrowing levels.

"The Middle East adds a new source of fiscal pressure to an already tense global situation," the agency said. "In a scenario of prolonged conflict, the share of global debt at risk could rise by an additional 4 percentage points."

**Global Implications**

As finance ministers and central bank governors gather in Washington this week for the IMF and World Bank Spring Meetings, the IMF's report criticized the fiscal policies of most major economies.

It pointed out that the United States "shows no sign of a debt consolidation plan," while China's persistent large deficits continue to increase its borrowing burden. The IMF also noted that several European Union member states have invoked exemptions under EU deficit rules to fund defense spending.

However, the IMF emphasized the unique role of the United States, as turmoil in the US Treasury market transmits globally.

"This transmission is global: supply-driven increases in US yields spill over almost one-for-one into foreign bond markets, disproportionately affecting countries reliant on external financing."