The Federal Reserve has added $344 billion in U.S. Treasury bills over the past year, shifting its portfolio toward the shortest end of the government debt market even as its total balance sheet declined over much of the same period. The change has coincided with a renewed rise in long-term Treasury yields, placing more of the duration risk from heavy federal borrowing in private markets.
Federal Reserve balance-sheet data show that the central bank’s overall assets fell mainly because mortgage-backed securities and Treasury notes with maturities of five to 10 years continued to run off. Treasury bill purchases moved in the other direction. In August alone, the Fed added a net $29 billion in bills, contributing to a $90 billion year-to-date increase in its balance sheet since February.
The pattern marks a different type of balance-sheet management from the broad asset purchases used during the pandemic. Rather than expanding holdings across Treasury maturities and mortgage bonds, the Fed has been increasing exposure to bills while allowing longer-dated securities and MBS to mature or roll off.
Short-term purchases leave duration with bond markets
Treasury bills mature in one year or less, making them less sensitive to interest-rate moves than longer-dated bonds. By purchasing bills while reducing holdings of intermediate Treasuries and mortgage securities, the Fed is concentrating more of its portfolio in instruments that need to be replaced frequently.
That composition can matter for the Treasury market even without a large overall balance-sheet expansion. The U.S. Treasury must issue substantial volumes of notes and bonds to finance the federal government, while the Fed’s reduced participation in longer maturities leaves banks, pension funds, insurers, asset managers, and overseas holders to absorb more of that supply.
Long-end yields have already moved higher. After trading largely within a 3.25% to 4.75% range across maturities following September 2022, the Treasury market broke above that range in June. The 30-year Treasury yield rose above 5%, while the 10-year yield climbed above 4.5%, according to the market levels cited in the supplied data.
The yield curve has also begun steepening, meaning the gap between short- and long-term yields is widening. A steeper curve often reflects greater compensation demanded by bond buyers for inflation uncertainty, fiscal borrowing needs, and the risk that rates remain elevated for longer than expected.
The shift does not establish that Fed bill purchases alone caused the rise in long-term rates. Treasury issuance, inflation expectations, economic growth, fiscal policy and foreign demand all feed into yields. Yet a central bank portfolio tilted toward short maturities provides less direct support to the longer-term securities that set borrowing costs for mortgages, corporate loans and many public financing projects.
Foreign Treasury holdings have softened
Demand from overseas buyers has weakened from earlier 2026 levels, according to U.S. Treasury data through June. Total foreign holdings of Treasuries fell from a first-quarter peak of $9.4 trillion as the Treasury continued to issue debt in larger volumes.
China’s holdings declined to $630 billion, down about $100 billion from a year earlier. The United Kingdom’s reported Treasury holdings moved above China’s, although UK custody data can include securities held by global financial institutions and do not necessarily represent solely domestic UK demand.
Japan remained the largest foreign holder in the figures described, with holdings broadly stable within a range of roughly $1 trillion to $1.25 trillion over the past decade. Stable Japanese demand offers some support to the market, but it has not offset the broader reduction from the first-quarter foreign-holdings peak.
The U.S. national debt crossed $39.8 trillion in August, according to the figures provided. Gross annual federal interest costs have exceeded $1.1 trillion. Rising interest expenses increase the government’s financing needs and can lead to larger auctions, particularly when maturing debt must be refinanced at current market rates.
Emergency facilities have returned to zero
The Fed’s emergency lending and repo programs created after the collapse of Silicon Valley Bank have returned to zero balances. Those facilities were designed to contain liquidity stress in the banking system and their disappearance from the balance sheet indicates that banks are no longer drawing on them.
The standing repo facility remains available. It allows eligible counterparties to exchange Treasury securities and other approved collateral for cash on a short-term basis, serving as a backstop for money-market funding rather than a routine source of liquidity.
The end of the emergency programs also makes the recent balance-sheet increase more closely tied to Treasury bill activity than to financial-stability lending. That distinction separates the current changes from the sharp asset growth seen during periods of acute market stress.
Over the past several years, the Fed reduced its balance sheet by about $2.2 trillion over four years, then expanded it by roughly $3 trillion within months during 2020 and by a further $4.5 trillion over two years, based on the historical totals cited in the supplied figures. The result is a balance sheet that remains far above its pre-pandemic scale despite the later runoff.
Inflation remains above the Fed’s target
Federal Reserve Chair Kevin Warsh reaffirmed the central bank’s 2% inflation target in remarks at the Jackson Hole symposium. At the time of those comments, year-over-year PCE inflation stood at 3.7%, while the six-month annualized pace exceeded 4%, according to the inflation measures cited alongside the speech.
Breadth also remained a concern. Fifty-four percent of items in the PCE basket had risen by more than 3% over the preceding year, compared with 32% before the pandemic. Such figures suggest price pressures were spread across a larger share of household expenditures than a headline measure alone may show.
Against that backdrop, the Fed’s preference for bills gives it flexibility to manage its portfolio without adding substantial long-duration exposure. It also leaves the Treasury market facing a practical test: whether private and foreign buyers will absorb expanding supplies of longer-dated U.S. debt without requiring even higher yields.
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