Governments worldwide are grappling with the escalating cost of public and private debt, exacerbated by a global surge in long-term interest rates. This financial strain not only complicates debt servicing but also poses a significant threat to sustainable economic growth. As independent central banks, constrained by persistent inflation, hesitate to deploy traditional monetary easing, finance ministries are exploring unconventional strategies to manage national debt.
With inflation often exceeding target levels, central banks are understandably reluctant to resume large-scale bond-buying programs (quantitative easing) or even cut benchmark rates. This reluctance compels treasury departments to seek alternative approaches, leading to what some term “backdoor quantitative easing.”
The Rise of Activist Treasury Issuance (ATI)
One such strategy, Activist Treasury Issuance (ATI), involves deliberately altering the composition of public debt. This approach gained prominence during the Biden administration in the United States, which began issuing a greater proportion of short-term debt.
ATI functions as a modern variant of past monetary operations. Unlike the Federal Reserve’s “Operation Twist”—where the Fed bought longer-term bonds while selling shorter-term debt to lower long rates—ATI achieves a similar outcome by simply issuing less long-term debt. This method has drawn criticism, notably from some Republicans and figures like current Treasury Secretary Scott Bessent, who view it as fiscal authorities encroaching on monetary policy. Despite these concerns and the prominent roles of Stephen Miran (chair of the Donald Trump administration’s Council of Economic Advisers) and Bessent within President Trump’s senior economic team, ATI continues. Halting it abruptly could sharply increase long-term rates, making its discontinuation politically challenging.
Global Contagion and Escalating Measures
Furthermore, Secretary Bessent has indicated the potential for an even more profound form of Treasury-led quantitative easing. He suggested that if market conditions became chaotic, the Treasury might undertake direct buybacks of longer-term public debt to stabilize interest rates. This expansion of ATI’s scope, combined with its continued use in the US, appears to be inspiring similar actions globally.
Japan, for instance, is reportedly considering its own ATI program. Facing rising 10-year bond yields—which have climbed significantly as the Bank of Japan normalizes policy—and a public debt-to-GDP ratio near 250 percent, Japan’s Ministry of Finance is evaluating issuing fewer long-term bonds in favor of more short-term debt. This development aligns with predictions that once a government adopts ATI, subsequent administrations may become reliant on it or even intensify its use, encouraging other nations to follow suit.
Future Candidates and Systemic Risks
While the Eurozone currently appears less likely to adopt ATI, primarily due to the European Central Bank’s existing emergency facilities for market stabilization and the absence of a centralized fiscal authority capable of issuing substantial joint union debt, the United Kingdom presents a more probable candidate given its fiscal challenges.
Economists have long debated the dynamic between governments pursuing loose fiscal policies and central banks committed to price stability. However, with elevated inflation persisting in major economies like the US, Japan, and the UK, and public debt burdens generally increasing, the traditional dynamic where central banks might reluctantly finance large deficits is shifting. The temptation for fiscal authorities to implement policies like ATI, designed to suppress long-term bond yields, is growing. Yet, this represents a perilous path, effectively allowing fiscal policy to interfere with monetary policy. Such actions can create dangerous inconsistencies between fiscal and monetary objectives, fostering moral hazard by encouraging excessive risk-taking and leverage, and ultimately fueling inflation. When monetary authorities are striving for price stability and preventing economic overheating, measures like ATI introduce looser financial conditions, potentially leading to a more politically influenced business cycle rather than one driven by sound economic fundamentals.
Michael Zhang is a seasoned finance journalist with a background in macroeconomic analysis and stock market reporting. He breaks down economic data into easy-to-understand insights that help you navigate today’s financial landscape.