By Spencer Jakab

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You might be telling your grandchildren about that amazing mortgage rate you snagged in 2021, but Austrians' great-grandchildren will still be talking about an even better deal.

With the world panicking over Covid-19 and overnight interest rates at zero in 2020, the U.S. Treasury ramped up short-term borrowing to send out stimulus checks. Austria went in the other direction-way in the other direction-selling a 100-year bond with an interest rate of just 0.85%.

Before taking over as Treasury Secretary, Scott Bessent criticized his predecessor, Janet Yellen, for not taking a page out of Vienna's playbook. He said she should have seized the opportunity to issue longer-term debt like notes-Treasury securities maturing in two to 10 years. So far, though, he's stuck with her preference for short-term bills, which make up a little more than a fifth of America's debt.

The appeal of selling so much short-term debt, other than ample demand, is that there might be a way to force down borrowing costs. While yields on Treasury notes and longer-term bonds do their own thing based on global supply and demand, the Federal Reserve can push down short-term borrowing rates, making bills less expensive.

That hasn't been the Fed's role during the postwar era, but President Trump has heaped pressure on the independent central bank to do so. The person he nominates to take over as chair next year-or sooner if he can force out Jerome Powell-will be someone he feels he can count on to comply.

Every president has wished for lower rates, but Trump might really need them given America's mounting debt problems. As debt issued during the crisis at low rates gets rolled over, the average rate on federal borrowings is rising. And the pile of debt is much larger now.

Interest payments are already close to $1 trillion-more than all non-defense discretionary spending combined. The "Big Beautiful Bill" just worsened the trajectory.

Whether lower rates happen naturally as inflation cools or through arm-twisting, though, is it smart for Bessent to ramp up short-term borrowing to trim that interest bill?

It would be like locking in an adjustable teaser-rate on a home mortgage-penny wise, but possibly pound foolish. Many learned that the hard way during the housing crisis. If inflation concerns send rates higher in the future, then today's gradual rise in the federal government's interest tab could be much quicker next time. That vicious cycle has destabilized many emerging-market economies.

And what if a compliant Fed kept rates lower even if inflation surged to give Uncle Sam a helping hand? It's been tried before and it's called fiscal dominance. The result usually has been ugly.

The upshot for investors? The longer the maturity of your fixed income portfolio, the more value it would lose if the gambit backfires. Just ask the Dummkopfs who bought that Austrian bond five years ago-they're already down 75% in real terms.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

July 16, 2025 07:07 ET (11:07 GMT)

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