Ballooning U.S. National Debt Makes Short-Term Bonds A Wiser Choice

The U.S. national debt has surged to $36.63 trillion as of last week. GETTY

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Ballooning U.S. National Debt Makes Short-Term Bonds A Wiser Choice

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The U.S. national debt is spiraling, and it’s poised to reshape the bond market. The government is issuing Treasuries at a rapid rate, but demand is struggling to keep pace.

This supply-and-demand imbalance may influence Treasury yields, making short-term bonds a potentially safer choice for fixed-income investors. Here’s why short-term bonds, like the two-year, might be the smarter play in the current environment.

The Debt Crisis And Treasury Yields

The U.S. national debt has surged to $36.63 trillion as of last week, according to the U.S. Treasury’s "Debt to the Penny" dataset. Recent legislative measures, including a December 2024 spending bill to fund the government and provide disaster relief, have contributed to a debt increase of approximately $1.13 trillion since September 2024, per data from the U.S. Government Accountability Office. This flood of new Treasuries is straining market absorption, as global demand—particularly from foreign investors—shows signs of waning.

The resulting supply-and-demand dynamics could influence 10-year Treasury yields, which are at 4.46% as of last week, according to Trading Economics. While some forecasts, like The Financial Forecasts Center, suggest yields may decline to around 3.27% by February 2026, the persistent issuance of Treasuries could exert upward pressure if demand weakens further.

Federal Reserve minutes from June 2025, as cited by CNBC, indicate a cautious approach, with most participants anticipating rate cuts, which could temporarily lower yields. However, the Fed’s balance sheet, currently at $6.7 trillion, limits its ability to suppress yields through large-scale bond-buying without risking inflationary pressures. Market forces will likely dictate yield trends over the long term, and investors should prepare for potential volatility as sovereign risk grows.

The Risks Of Long-Term Bonds

At current yields of 4.46%, long-term bonds may not adequately compensate for potential risks. If yields rise due to increased Treasury issuance or shifts in market dynamics, bond prices will fall, particularly affecting longer maturities. The yield curve’s recent behavior, with long-term rates holding firm despite anticipated Fed rate cuts, underscores this risk.

Higher yields could also shift capital flows. A significantly higher Treasury yield, outpacing inflation—currently around 2.5% as of mid-2025 per latest Consumer Price Index numbers—or faltering GDP growth, could draw capital from equities in a volatile market BLS, 2025. Investors holding long-term bonds at today’s yields could face price declines if yields increase, locking them into suboptimal returns.

The Case For Short-Term Bonds

In this climate, it’s wise to focus on short-term bonds, particularly the two-year. These maturities are less sensitive to yield fluctuations, offering protection against price declines. Short-term bond funds, with durations of one to three years, are effective vehicles for navigating this environment. They also provide flexibility, allowing investors to reinvest at potentially higher rates if yields rise.

In a recession, where Fed rate cuts might temporarily lower short-term yields, these bonds are likely to hold their value better than long-term counterparts. As market dynamics shift, short-term bonds position investors to balance safety and opportunity in a debt-driven market.