The US government faces a growing refinancing risk as a large portion of its $39.5 trillion debt comes due while Federal Reserve officials consider raising interest rates.

The Treasury has relied heavily on short term securities to limit borrowing costs, issuing debt that typically carries lower yields than longer maturity bonds. Capital Economics estimates that Treasury bills accounted for roughly 85% of federal debt issuance over the past few years.

That strategy reduced immediate interest expenses but increased the frequency at which the government must refinance its obligations. About 20% of outstanding federal debt will mature during the next four months, with the share reaching roughly 33% within a year, according to Capital Economics.

The concentration creates a direct link between Federal Reserve policy and the government’s debt servicing costs. If the Fed raises rates more aggressively than expected, maturing bills would need to be replaced with new securities carrying higher yields.

The risk is increasing as the central bank adopts a firmer position on inflation. Fed Chair Kevin Warsh recently said the central bank has no tolerance for persistently high inflation, while half of Fed policymakers now support raising rates.

Cleveland Fed President Beth Hammack has also indicated that inflation is a greater concern than employment. Hammack said the labor market was near her estimate of maximum employment while price growth remained too high, adding to calls for tighter monetary policy.

Bank of America revised its forecast in June and now expects three quarter point rate increases during 2026, reversing its previous projection that rates would remain unchanged. Markets continue to see a pause as the most likely outcome at the Fed’s July meeting but have assigned a growing probability to an increase by September.

Higher energy costs could strengthen the case for tighter policy. Renewed fighting between the US and Iran pushed oil prices higher and sent the national average gasoline price back above $4 per gallon, adding another source of inflation pressure.

The refinancing pressure comes as the government continues to add new debt. Total federal debt reached $39.52 trillion on July 16, including about $31.82 trillion held by the public. The Congressional Budget Office projects a $1.9 trillion budget deficit for fiscal 2026.

Interest expenses are already consuming an increasing share of federal spending. The CBO expects net interest outlays to surpass $1 trillion in 2026 and rise to $2.1 trillion by 2036 as deficits and borrowing costs increase.

The Treasury also faces greater competition for capital. Technology companies are issuing debt to finance large artificial intelligence infrastructure investments, while other governments are increasing borrowing for defense and public spending.

Demand for long duration Treasury securities has weakened as well. Hoisington Investment Management, which maintained a bullish view on government bonds for more than three decades, recently reversed its position and warned that growing deficits and persistent inflation could force investors to demand higher yields.

The immediate risk is not that the government will be unable to refinance its debt. Treasury markets remain highly liquid, and demand for short term bills continues to be supported by money market funds and other cash investors.

The longer term concern is that repeated refinancing at elevated rates will steadily lock higher borrowing costs into the federal balance sheet. With one third of the debt potentially turning over within a year, even a modest increase in short term yields could accelerate interest expenses and make the current fiscal path harder to sustain.