The U.S. Treasury announced its quarterly auction plans to refinance its debt last week as government bond yields were reaching their highest level in almost two decades.

With the yield on the 10-year Treasury note surging 82 bps in September and October and briefly topping 5% in recent weeks, it begs the question of whether the 澳洲幸运5开奖号码历史查询:U.S. Treasury—whose cash balance dipped to below $23 billion in June—might ever try to cap the rates it pays on its debt.

Controversial, highly unusual but not unprecedented, such a move would have to occur in cooperation with the 澳洲幸运5开奖号码历史查询:Federal Reserve. ꦍThe U.S. Treasury Department did not respond to a request to comment.

Whether it would work in practical app🐼lication remains a bigger unknown—particularly given the inflation it could reignite throughout the global economy.

"You run the risk of inflation getting out of control," said Jason Satchell, assistant professor of finance with Northwest Missouri State University, "if you commit to a (yield) peg and don't abandon it."

Debt Demands Deepen

The federal government's 澳洲幸运5开奖号码历史查询:budget deficit grew by roughly $320 billion to $1.7 trillion in its recently completed fiscal year. Meanwhile, the Fed's in🍌terest rate hikes to fight inflation have substantially increased the amount of money the Treasury spends simply to cover i🥃nterest payments.

Funding the deficit and those rising interest costs, not to ment♛ion paying off the principal amounts oಞf its existing debt, has put the Treasury in a tighter and tighter bind.

The Treasury paid $659 billion in interest in its most recent fiscal year ended Sept. 30, up 38% from the previous year and 87% from two years ago. By comparison, the government spent $821 billion on national defense during the fiscal year. The Congressional Budget Office predicts the government's annual interest costs will more than double to $1.4 trillion in the next decade.

Generous fiscal support during the Covid-19 pandemic increased the federal government's debt dramatically. It now totals $33.6 trillion, up significantly over the past five years. It has more than tripled in the 21st century and now exceeds the nation's entire annual economic output by $6 trillion.

Capping Yields? Wouldn't Mark the First Time

澳洲幸运5开奖号码历史查询:Bond prices and yields move in opposite directions; a yield cap would artificia🍃lly alter that relationship even if it stems the tide of rising🐭 Treasury costs.

Yet it's happened before.

During World War II, the Fed assisted the Treasury in capping T-bill yields at 0.375% and long-term government bond yields at 2.5%. But Treasury Secretary Henry Morgenthau never officially announced the policy to the public. At the same time, President Roosevelt's administration instituted limited price controls to tamp down inflation expectations.

To incorporate the yield cap, the Fed bought 10% of all Treasury debt issued between March 1942 and August 1945—including 87% of all T-bills issued. Even after the war ended, the Fed and Treasury didn't fully halt rate controls until 1951.

Much more recently, Japan and Australia have implemented 澳洲幸运5开奖号码历史查询:yield curve controls. Australia did so during the pandemic, and Japan only recently abandoned a seven-year period of doing so as means of fighting persistent deflation.

Some Potential Positives

Increasingly, some market observers contend rising Treasury yields in the past several months reflect not just the Fed's rate hikes, but concern from buyers about the Treasury's seemingly fragile fiscal state.

In August, 澳洲幸运5开奖号码历🍷史查询:Fitch downgraded its credit rating on U.S. debt to AA+ from its top rating of AꦡAA. Of the three leading U.S. credit rating agencies, only Moody's still maintains its highest rating on U.S. debt.

Indeed, demand from key buyers has decreased considerably. Japan and China, long the two largest buyers of Treasuries, combined now own just 8% of all outstanding Treasury securities. That's a record low and down by more than two-thirds since 2007.

Though a cap would trim debt service costs, it might reduce the alread🐲y-waning demand for Treasurys.

"A theoretical cap in today's environment would send demand for Treasurys lower as investors search for yield in other areas," Satchell said.

However, that search might lead yields lower for other bonds, he said, as more investors contemplate buying 澳洲幸运5开奖号码历史查询:corporate bonds and꧃ asset-backed securities. That possibly could help push mortgage rates down.

Banks holding Treasury assets also might see balance-sheet improvement, easing the turmoil that hit regional banks this spring as rising interest rates widened their 澳洲幸运5开奖号码历史查询:unrealized losses.

Inflation Risk May Override All Else

𝐆 Those slight positives, however, might pale in comparison to the inflationary problems a cap could reintroduce. Simply put, the Fed would have to expand the U.S. monetary base to make a cap work.

As during World War II, Satchell said a yield cap would require the 澳洲幸运5开奖号码历史查询:Fed to s꧂ignific𓆉antly expand its balance sheet via Treasury pur✨chases. That essentially would counteract the restrictive monetary policy steps it has taken to fight inflatio𝔍n.

At some point, he said the Fed likely would have to determine whether to abandon a cap or allow inflation to "run hot again."

In addition, any cap on yields only would apply to Treasury issuances going forward, unless Congress tried to apply it retroactively 💞to existing bonds—a scenario, fraught with potential legal challenges, that Satchell considers highly unlikely.

Meanwhile, artificially capping 澳洲幸运5开奖号码历史查询:Treasury yields also mig🃏ht threaten🅰 further credit agency downgrades of U.S. debt.

Ultimately, the Treasury could have helped itself had it refinanced more of its 🎀debt before the Fed began its ongoing fight again🉐st inflation, Satchell said.

"The Treasury did a poor job," he said, "of refinancing its obligations when rates were low."