Basent or reshaping US bond issuance strategy? Wall Street debates cutting long-term US bond issuance, November refinancing meeting becomes key

According to Zhitong Finance APP, US Treasury Secretary Janet Yellen’s recent more active intervention in the US Treasury market is prompting Wall Street to re-evaluate the government's future debt financing strategy. Institutions such as Deutsche Bank, Morgan Stanley, and Citigroup believe that as long-term Treasury yields remain at multi-year highs, the US Treasury may further adjust its issuance structure in the coming months, and in extreme cases, may even reduce the scale of long-term Treasury issuances.

The key event that the market is focusing on is the US Treasury’s Quarterly Refunding Announcement on November 4. Analysts believe that rather than directly cutting the issuance of long-term Treasuries, it is more likely that the Treasury will shift more of its new financing needs toward short-term Treasury bills and shorter-dated notes, while continuing to expand long-term bond buybacks to alleviate pressure on long-end yields.

For a long time, the US Treasury’s debt management policy has emphasized “regularity and predictability” in order to minimize policy changes themselves from shocking the world’s largest bond market. But Yellen’s recent series of moves are changing this tradition.

Meghan Swiber, Managing Director of US Rates Strategy at Bank of America, says the Treasury market is entering “a whole new world” of US debt management. Ian Lyngen, head of US rates strategy at BMO Capital Markets, notes that Yellen’s recent actions have made the November refunding announcement a bigger “uncertainty factor” than before, and that it can no longer be ruled out that the Treasury will cut the size of long-term Treasury auctions.

Currently, Yellen still states that the Treasury will not change its regular auction arrangement at least until the next quarterly refunding. However, the Treasury announced last week an expansion of its bond buyback plan, calling this strategy a “Treasury twist.” This has clearly heightened market focus on possible policy adjustments in November.

Deutsche Bank strategists including Steven Zeng believe that the Treasury’s next step may be to further increase the size of single long-term bond buybacks, exceeding the currently recommended minimum of $400 million.

Meanwhile, the Treasury might even choose to only announce the specific buyback size a day before it is carried out.

This approach would reduce the predictability of the buyback plan while increasing the risks for investors shorting long-term Treasuries. Since traders can no longer determine in advance when and at what scale the Treasury will enter the market, the threshold for betting on long-term Treasury price declines and yield increases will be significantly raised.

However, merely expanding buybacks is not enough to fundamentally change the maturity profile of US government debt.

Unlike the Federal Reserve, the Treasury cannot create money to buy bonds; thus, funds for repurchasing long-term bonds still ultimately need to come from other sources, including raising issuance of short-term Treasury bills or drawing down the Treasury General Account (TGA) at the Fed.

Morgan Stanley rate strategist Martin Tobias believes the current expansion of bond buybacks serves more as a transitional measure before the November quarterly refunding. What may really have a significant market impact is how the Treasury will shorten the weighted average maturity of US government debt in the future.

Tobias expects the Treasury to likely gradually increase issuance of shorter-dated notes while keeping long-term Treasury issuance broadly stable. However, he also points out that over the past week, the possibility of the Treasury directly cutting long-dated Treasury auction sizes has increased.

Indeed, the Treasury has already made subtle adjustments to its policy wording.

In the most recent quarterly refunding announcement, the Treasury said it is studying potential “adjustments” to the issuance sizes of coupon-bearing Treasuries and floating-rate notes, whereas previously it used the term “increases.”

Analysts believe this change in wording leaves the Treasury with more policy room to cut some long-term Treasury issuance in the future.

Some Wall Street institutions are even discussing more aggressive debt structure adjustment plans.

Citigroup has postponed its forecast for an expansion in Treasury auction sizes to 2028, while also warning of a tail risk scenario where the Treasury may ultimately cancel the 20-year US Treasury bond.

The 20-year Treasury was reintroduced in 2020 during Trump’s first term, but its performance has been relatively weak. Although its maturity is shorter than the 30-year Treasury, its yield is close to that of the 30-year, which appears quite unusual in the context of today's upward-sloping yield curve.

Jason Williams, Head of US Rates Strategy at Citigroup, believes the 20-year Treasury could become the biggest beneficiary of future Treasury issuance structure adjustments, since it has underperformed both the 10- and 30-year notes. The Treasury may prioritize cutting the auction size of the 20-year bond. Citigroup currently recommends clients go long on the 20-year Treasury.

There is also historical precedent for the US cancelling long-term bond issuances. The Treasury stopped issuing 30-year bonds in 2001, but at that time the US government had a fiscal surplus and much lower funding needs than today.

The situation is completely different now. The government needs large-scale debt financing, so if the issuance or even existence of a particular tenor is reduced or cancelled, the funding demand must be absorbed by other maturities.

Kevin Flanagan, Head of Investment Strategy at WisdomTree, warns that with such massive financing needs, attempting to shift funding away from long-term Treasuries to other tenors could be mathematically very challenging.

More importantly, if the market perceives the Treasury as deliberately manipulating yields, such policy could backfire.

This is the core of the debate on Wall Street: Yellen can use buybacks, issuance tenor adjustments, and changes to the auction structure to influence supply and demand for long-term Treasuries to some extent, but none of these measures eliminate the US’s enormous fiscal financing needs.

As long-term Treasury yields remain at multi-year highs, quarterly refunding announcements—which didn’t usually trigger major market moves in the past—may now become key events for the global bond market.

Overall, Yellen is pushing the US Treasury to adopt a more proactive debt management approach, and the November 4 quarterly refunding announcement may be a critical juncture for the next policy changes. Wall Street currently expects an increase in short-term funding and an expansion of long-term bond buybacks as more likely, but the possibility of cutting long bond auction sizes or even adjusting the 20-year Treasury is also entering discussions.