Why the U.S. Treasury Likes a Weak Dollar

The U.S. Treasury has been stealthily weakening the dollar. It isn’t clear if it is doing so consciously, but since a weaker dollar suits Treasury leadership, there probably isn’t too much concern. The key is that the Treasury is flooding the market with short-term debt that neither domestic nor foreign investors are very interested in buying. The Federal Reserve is capping the yield on the debt with its promises to raise rates gradually and to keep rates below long-term levels for some time. Taken together, we have a surge of short-term issuance at very negative real rates.

The skew in issuance is striking. Since August 2017, Treasury bills, which mature in one year or less, have represented 63 percent of the increase in bills, notes and bonds, as the chart below shows. As a share of the total stock, bills have gone from 14 percent to 16 percent during the past six months.