rewrite this title What a $34 Trillion Debt Could Mean for Long-Duration Bonds

The United States is hurtling toward a financial reckoning. With the national debt now exceeding $35 trillion growing by nearly $1 trillion every 100 days the country faces an unprecedented fiscal crisis. Interest payments alone have surpassed $1 trillion annually, consuming an ever-larger share of federal revenues. As the 2024 election looms, former President Donald Trump could proposed a radical solution: a dramatic shift toward short-term borrowing combined with aggressive Federal Reserve rate cuts. But will this strategy save America from fiscal collapse or accelerate its demise?

The Debt Trap: Why America’s Finances Are on Shaky Ground

America’s debt crisis isn’t just about the staggering $35 trillion figure it’s about how that debt is structured. With an average maturity of just six years, the U.S. Treasury must constantly refinance its obligations. In today’s high-rate environment, each refinancing operation becomes more expensive, pushing interest costs toward unsustainable levels. The Congressional Budget Office warns that, without drastic action, debt servicing could soon surpass defense spending, crowding out critical investments in infrastructure, healthcare, and education.

Trump’s answer? A bold and risky restructuring of America’s debt portfolio.

The average weighted maturity of US debt is 72.3 months, meaning it would take years for the bulk of US debt to roll over at hypothetically higher rates.

U.S. interest payments on national debt are projected to skyrocket 80% by 2035, from $1 trillion to $1.8 trillion annually, becoming the fastest-growing federal expense.

The Trump Debt Playbook: Short-Term Borrowing, Fed Pressure, and Market Manipulation

Step 1: Flood the Market with Short-Term Debt

The plan calls for a sharp reduction in long-term Treasury bond issuance (10-year and 30-year notes) while dramatically increasing the sale of short-term Treasury bills (3-month to 1-year maturities). The goal? Avoid locking in today’s high interest rates for decades.

Step 2: Strong-Arm the Fed Into Cutting Rates

Trump has long criticized the Federal Reserve for keeping rates elevated. He could appoint dovish Fed officials or publicly pressure the central bank to slash rates, making short-term borrowing cheaper.

Step 3: Artificially Suppress Long-Term Yields

By reducing the supply of long-term bonds, the Treasury could create artificial scarcity, driving up bond prices and pushing down yields. The hope? Investors, starved for long-dated Treasuries, would accept lower returns.

Historical Warnings: When Short-Term Debt Experiments Failed

1970s America: Inflation, Rate Hikes, and Disaster

In the 1970s, the U.S. relied heavily on short-term borrowing to avoid high long-term rates. But when inflation spiked, the Fed under Paul Volcker was forced to hike rates aggressively, sending short-term borrowing costs soaring and triggering a brutal recession.

Italy’s 2011 Debt Crisis: A Cautionary Tale

Italy once financed its deficits primarily with short-term debt. When the European debt crisis hit, investors refused to roll over maturing bonds, forcing Rome into a humiliating bailout.

Japan’s “Lost Decades”: The Cost of Financial Engineering

Japan’s central bank has kept long-term rates near zero for years, but at the cost of economic stagnation and a debt-to-GDP ratio exceeding 260%.

The lesson? Short-term debt works until it doesn’t.

The Domino Effect: How This Could Backfire Spectacularly

1. The 2027 Refinancing Cliff

If rates rise again, rolling over trillions in short-term debt could become prohibitively expensive.

2. Foreign Investors Flee

China, Japan, and other major Treasury holders could dump U.S. debt, sending yields soaring.

3. Pension Funds Panic

With fewer long-term bonds available, retirees could face benefit cuts as funds struggle to match liabilities.

4. The Fed’s Impossible Choice

If inflation resurges, the Fed would face a nightmare: Keep rates low and let inflation run wild, or hike rates and trigger a debt crisis.

5. The Dollar’s Decline

A loss of confidence in U.S. debt could weaken the dollar, fueling inflation and further destabilizing markets.

Moreover, this DXY chart shows the dollar has already lost 12.5% of its value since Trump’s election

How One Might Approach Trading a Long-Term Rate Decline Scenario Using TLT, IEF, or TMF

If an investor were to anticipate a potential decline in long-term interest rates (for example, due to possible Fed easing, economic softening, or moderating inflation), certain ETFs could theoretically provide exposure to this scenario:

TLT (iShares 20+ Year Treasury Bond ETF): This ETF tracks long-duration U.S. Treasuries (20+ years). In theory, if long-term yields were to fall, TLT’s price could rise significantly due to its sensitivity to interest rate changes.

Technical Perspective on TLT’s Long-Term Support Level

When examining TLT’s monthly chart, a notable support level appears around $84, which has held for over two decades. This historical floor could potentially serve as a reference point for investors considering a long-term bet on declining U.S. interest rates, as:

Historical Significance: The $84 level has repeatedly acted as a reversal zone since the early 2000s.
Risk/Reward Context: A hypothetical bounce from this level might align with a scenario where long-term yields peak and reverse, given TLT’s inverse relationship to rates.
Caveats:

Breakdown Risk: A sustained drop below $84 could invalidate the pattern, signalling structural bearishness for bonds.
Macro Dependence: Even at support, TLT’s performance would depend on inflation trends and Fed policy shifts.

Key Takeaway: While the $84 level may offer a technical entry reference, its efficacy would likely hinge on broader macroeconomic conditions confirming a long-term rate decline.

IEF (iShares 7-10 Year Treasury Bond ETF): Focusing on intermediate-term Treasuries, this ETF might be less volatile than TLT but could still benefit from a potential decline in rates.

TMF (Direxion Daily 20+ Year Treasury Bull 3x Shares): As a leveraged ETF, TMF seeks to deliver 3x the daily return of TLT. While this could amplify gains in a falling-rate environment, it would also magnify losses if rates moved unfavorably.

Potential Risks to Consider

Interest Rate Reversals: Should long-term yields rise unexpectedly (due to persistent inflation or a more hawkish Fed stance, for instance), bond ETFs like TLT and IEF could decline in value. TMF’s leveraged structure could exacerbate these losses.
Leverage Decay (TMF): Given its daily reset mechanism, holding TMF over extended periods might lead to performance erosion, especially in volatile markets. It might be more suited to short-term trading strategies.
Duration Sensitivity: Longer-duration bonds (such as those in TLT) tend to be more reactive to rate changes, which could lead to heightened volatility.
Policy Misinterpretation: If market expectations for rate cuts were overstated, bond prices might underperform or even decrease.
Liquidity and Tracking Differences: While Treasury ETFs like TLT and IEF are generally liquid, leveraged products like TMF might not perfectly track their underlying index over time.

Strategic Considerations

ETF Selection: Investors might weigh the trade-offs between the relative stability of TLT/IEF and the amplified (but riskier) exposure of TMF.
Hedging Possibilities: In a more cautious approach, some might consider pairing these positions with inverse ETFs (such as TMV) to offset potential losses from rising rates.
Macroeconomic Monitoring: Key indicators like inflation data, Fed communications, and economic growth metrics could help inform any adjustments to such a strategy.

In summary, while ETFs like TLT, IEF, or TMF could, in theory, be used to express a view on declining long-term rates, they come with material risks particularly in leveraged or long-duration products. Any such strategy would require careful risk assessment and ongoing monitoring of market conditions.

The Verdict: A High-Stakes Bet With No Easy Exit

Trump’s strategy might temporarily reduce debt costs, but it does nothing to address the root cause of America’s fiscal woes: runaway spending. Worse, it could amplify financial fragility, leaving the U.S. vulnerable to a catastrophic debt spiral.

Best-case scenario? A short-term reprieve followed by years of stagnation (see: Japan).Worst-case scenario? A full-blown debt crisis that makes 2008 look mild.

Final Thought:The bond market punishes reckless fiscal policy, as was seen during Liz Truss’s brief UK premiership. If America gambles wrong, the consequences could echo for generations.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.