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Morning Edition · Tuesday, October 13, 2026Published at 1:12 AM EDT · New York
IMF warns top economies face their biggest budget deficits since Covid as funding stress reaches US short-term markets
Rising sales of Treasury bills are pushing up short-term US lending rates. Government borrowing is now straining the overnight funding market the Federal Reserve controls, not only the market for long-term bonds.
The International Monetary Fund (IMF) told member governments at its annual meetings in Bangkok that the largest economies are on course for their biggest budget deficits since the Covid pandemic. The fund called for "urgent" action to rebuild public finances. The Financial Times led its morning briefing with the warning and described the state of public finances as dire.
The warning comes as the cost of financing those deficits moves into a new part of the US market. Strain that had built up in long-dated Treasuries now appears to be moving toward short-term lending markets, according to the Financial Times, because the Treasury is selling more short-dated bills. More bill supply draws cash out of overnight repurchase lending and lifts the rates banks and funds pay for liquidity. That complicates the Federal Reserve's task, because those overnight rates are the ones it aims to control.
The IMF's own numbers show the scale of the US problem. Its April Fiscal Monitor projected US general government deficits of 7% to 8% of gross domestic product (GDP) over the medium term. It called that level unprecedented in peacetime for an economy with no spare capacity, and it saw gross debt rising from 123.9% of GDP in 2025 to about 142% by 2031. France is also under pressure. Its debt sits just under 120% of GDP, and investor doubts about its finances have deepened.
In Buenos Aires, Ámbito summarized the fund's outlook as a world governed by high energy prices, persistent geopolitical tension and higher interest rates. That combination makes deficit financing harder. Precious-metals desks report that traders have moved to price some risk of a Federal Reserve rate increase in December. The dollar remains firm against other major currencies.
From a hard-money perspective, the pattern is familiar. Governments that cannot sell long-term bonds at acceptable yields shift their issuance to short-term bills instead. Bills behave much like money within the financial system, and they eventually require central-bank reserves to absorb them. The IMF is calling for fiscal consolidation. For now, the market data show the financing gap being closed through shorter maturities.
Part of a tracked trend
The Long-End Revolt
Governments will keep reaching for balance-sheet tools to suppress long-term yields, and bond markets will keep repricing duration higher anyway, so each intervention transfers demand into scarce assets instead of lowering borrowing costs.
What this means
The mechanism is maturity shortening. When the Treasury funds deficits with bills instead of bonds, the pressure shifts from long-term yields to overnight funding rates. Money-market funds, leveraged bondholders that rely on repurchase loans, and banks with thin reserve buffers are exposed first. The IMF's warning itself is already priced in, since the deficit numbers are known. What is new is evidence that the short end of the market is now absorbing the strain. The consensus view treats a Federal Reserve rate increase as the main risk. But the September 2019 spike in repurchase rates shows what else can happen: the Fed restarted bill purchases within weeks to calm funding markets, expanding its balance sheet even as officials insisted policy remained tight. The likelier outcome over the next few months is that the Fed adds reserves, either through bill purchases or wider use of its standing lending facilities, while keeping its policy rate high. That would amount to balance-sheet expansion in practice, and it would support gold relative to Treasuries. This forecast depends on bill issuance staying heavy into year-end. It would be proven wrong if overnight funding rates settle back toward the Fed's target without any new Fed operations.
What to watch
- The spread between overnight repurchase rates and the Federal Reserve's policy rate: if the gap keeps widening, the Fed is more likely to add reserves, which would mean easier liquidity whatever it does with its policy rate.
- The Treasury's next quarterly refunding announcement: a further shift toward bills would confirm that the government is avoiding long-term borrowing at current yields.
- French bond spreads over German bonds: a widening would show that the IMF's deficit warning is turning into higher borrowing costs in Europe as well.
Observations to monitor, not financial advice.
Synthesized from: Financial Times · Financial Times World · Financial Times World (FirstFT) · Ámbito
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Comments
1Oct 13, 5:12 AM
The test is whether secured overnight rates trade persistently above the interest the Fed pays on reserves, which would push the Fed toward buying bills to add reserves.