Financial Repression 2.0: Keep Your Eyes on the US Treasury

For the better part of the last four years, commercial real estate investors have been waiting for the Federal Reserve to lower interest rates, hoping that cheaper financing would eventually provide relief to capital markets. But what if the most consequential decision affecting long-term borrowing costs doesn’t come from the Fed at all?

What if it comes from the U.S. Treasury Department?

Ahead of this week’s quarterly refunding announcement, some Wall Street strategists, including those at Citigroup, suggested the Treasury could reduce longer-dated bond issuance, shifting more borrowing toward shorter maturities.

The implications for commercial real estate financing deserve attention.

The government’s growing competition for capital

The federal government faces enormous borrowing requirements, with annual deficits approaching $2 trillion. Meanwhile, the private sector is entering one of the largest investment cycles in decades, driven by artificial intelligence, data centers, power generation and infrastructure development.

Much of this investment requires long-duration capital.

With government borrowing requirements remaining elevated and private-sector capital demands accelerating, an interesting question emerges: Does it make sense for the Treasury to continue competing aggressively for long-duration capital?

One alternative would be to shift more federal borrowing toward Treasury bills and shorter-dated notes, limiting the duration the market must absorb.

In theory, reducing longer-dated government bond supply could compress term premiums, placing downward pressure on long-term yields without requiring the Fed to reduce policy rates.

The Treasury has already expanded longer-dated bond buybacks, officially to improve market liquidity. Whether these actions become part of a broader duration-management strategy remains an open question.

Could the Treasury reverse the crowding-out effect?

For decades, economists have discussed the crowding-out effect, where government borrowing competes with private investment for capital, potentially pushing interest rates higher.

But what happens if the Treasury deliberately moves in the opposite direction?

Reducing longer-dated issuance could create additional capacity for private-sector borrowers precisely when demand for long-term financing is accelerating.

Institutional investors with long-duration mandates would still need assets matching their liabilities. With fewer long-dated Treasuries available, some demand could migrate toward corporate bonds, structured credit, infrastructure debt and commercial mortgages.

The Treasury could potentially influence not only benchmark borrowing costs, but also the relative attractiveness of competing fixed-income investments.

Where could CRE financing become more competitive?

For commercial real estate borrowers, the more interesting question may not be whether the Treasury yields decline, but whether an issuance shift could alter relative pricing across capital providers.

Life insurance companies are particularly interesting. Their long-term liabilities create natural demand for duration, while commercial mortgages offer attractive spreads over comparable government securities. Reduced Treasury supply could encourage more aggressive allocations to commercial mortgage lending.

CMBS could benefit similarly. Greater institutional demand for structured mortgage credit could tighten securitization spreads, translating into more competitive loan pricing.

Banks present a different equation. Their pricing reflects deposit costs, swap markets, regulatory capital requirements and balance-sheet considerations. Lower Treasury yields could improve fixed-rate executions, but transmission would be less direct for floating-rate loans tied to SOFR.

Importantly, reducing 20- and 30-year issuance would not necessarily produce equivalent movements in the five- and 10-year benchmarks commonly used in CRE financing.

Nevertheless, the possibility of both lower benchmark yields and tighter mortgage credit spreads is worth considering. The latter could prove equally consequential.

Financial repression without the Fed?

Following World War II, policymakers suppressed nominal borrowing costs relative to inflation, gradually reducing the real burden of government debt.

Today’s circumstances differ, but could Treasury debt management become another mechanism for influencing long-term borrowing costs without direct Federal Reserve intervention?

Shifting borrowing toward shorter maturities carries refinancing risk, and reduced Treasury issuance doesn’t guarantee lower yields or tighter credit spreads. But the possibility raises an interesting question about how policymakers might accommodate growing private-sector capital demands while managing enormous federal financing requirements.

Commercial real estate investors should be watching for any indication the Treasury is reconsidering the maturity composition of its borrowing.

For years, we’ve looked to the Federal Reserve for the next catalyst in financing markets.

Perhaps we’ve been watching the wrong institution.

John Darrow is executive vice president & managing principal of debt and equity at SRS Real Estate Partners.