(Bloomberg) - Bond market participants widely see the US Treasury refraining from any major shift in debt-issuance plans in a key statement Wednesday, though the Trump administration’s aggressive financial maneuvers elsewhere have put investors on watch for any surprise move to hold down yields.
Next week’s so-called quarterly refunding auctions are anticipated at $125 billion, where they’ve been since May 2024 — the longest stretch of unchanged sales since the mid-to-late 2010s, when the totals were less than half what they are now. The Treasury may also reiterate past guidance that it aims to maintain sales of interest-bearing securities steady for “at least the next several quarters.”
While Treasury Secretary Scott Bessent had suggested favoring a tilt in issuance toward longer-dated securities before he took office, their higher yields have made that unattractive. Ten-year notes — his key market metric — yield around 4.27%, more than 70 basis points more than 12-month bills.
Federal budget deficits mean the Treasury eventually is expected to boost auctions of securities beyond bills, which mature in up to a year. Debate among market participants has centered on whether Bessent’s team will hold off on taking that step until 2027, and even potentially scale back issuance of the longest-dated debt to temper their yields.
Diminished investor demand for the likes of 30-year bonds round the world has prompted governments in Europe and Japan to reduce issuance of such securities, raising questions about whether the US might do the same.
Fed’s Role
“The real focus will be whether they are looking to adjust coupon sizes lower in light of high bill demand,” said Guneet Dhingra, head of US interest-rate strategy at BNP Paribas. Though he expects unchanged auction sizes for the coming quarter, Dhingra has suggested the government could abolish the 20-year bond it revived in 2020 to lukewarm demand.
A bigger-than-expected move by the Federal Reserve to purchase T-bills, unveiled in December, potentially offers the Treasury some space to boost its issuance of those securities. The decision, tied to management of bank reserves rather than monetary policy, involves $40 billion of bill purchases a month until April, cutting the amount of bills the Treasury needs to sell to private-sector investors.
The future role of the Fed in the bond market also got fresh attention Friday, when Trump tapped Kevin Warsh to take the US central bank’s helm in May. The former Fed governor has called for a “new accord” with the Treasury that spells out what the Fed’s strategy will be with regard to managing its bond portfolio. He hasn’t specified what he has in mind, however.
Any Treasury hint to cut bond sales Wednesday would come as a surprise, after the Treasury in its November refunding statement said it had “begun to preliminarily consider future increases” to sales of coupons, or interest-bearing securities. The department said it was focusing on “evaluating trends in structural demand and assessing potential costs and risks of various issuance profiles.”
Investor Questions
Since then, President Donald Trump has taken extraordinary steps to address voter concerns about affordability, including with regard to housing. Recent moves have included ordering large-scale purchases of mortgage bonds and an effort to cap credit-card rates.
“Investors have naturally asked whether Treasury could be considering a more activist shift in its debt management strategy in order to help facilitate the administration’s goals of lower long-term yields,” JPMorgan Chase & Co. rates strategists, led by Jay Barry, wrote in their preview of this week’s debt-policy statement.
Ben Jeffery, a US rates trader at BMO Capital Markets, said “we’ve even heard chatter around the potential for calling off 20s entirely, or even reducing 30-year issuance in favor of boosting bill auction or 2-year auction sizes instead.”
Any sudden shift in strategy would conflict with the Treasury’s longstanding philosophy of being “regular and predictable” in its issuance strategy. Bessent himself repeatedly invoked that refrain in remarks at an annual conference on the Treasury market in November.
As for next week’s refunding auctions, dealers widely expect they will be made up of:
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$58 billion of 3-year notes on Feb. 10
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$42 billion of 10-year notes on Feb. 11
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$25 billion of 30-year bonds on Feb. 12
Ahead of Wednesday’s statement, the Treasury on Monday afternoon updated its estimate of expected borrowing needs for the current quarter. It trimmed its projection to $574 billion, down $4 billion from what it had penciled in in November. The Treasury continued to see a cash balance of $850 billion at the end of March.
If and when the Treasury does take the step of boosting coupon sales, some market participants see it leaning on the 2- to 7-year part of the curve — referred to as the belly by investors — while leaving the longest-dated sales, such as of 20-year and 30-year bonds, unchanged.
“They can increase pro-rata across the board, or they can say the market is demanding these sort of belly securities,” said Amar Reganti, a fixed income strategist at Hartford Funds who formerly worked at the Treasury’s Office of Debt Management. “Our model is telling us that that’s a place where we’ve had historically the best issuance.”
Dealers will also be on watch Wednesday for any tweaks to the Treasury’s program of buying back older, outstanding securities and whether it will selectively boost sales of Treasury inflation protected securities, or TIPS, to keep their share of the overall market steady.
TIPS Sales
Several banks predict that at least one of the three TIPS auctions will be increased. TIPS are sold once a month in a rotation that includes new issues and reopenings of 5-, 10- and 30-year debt, with reopening sizes generally following the new-issue pattern. The coming quarter features a 30-year reopening in February, a 10-year reopening in March and a 5-year new issue in April.
After a series of increases aimed at stabilizing the TIPS market share, the department last year indicated it would pause that pattern, and maintained its January 10-year new issue at $21 billion. Still, several dealers see potential for the 5-year new issue to increase by $1 billion to $27 billion based on stronger demand for that tenor.
With TIPS share of the debt still in a downward trend, “there may be just enough for Treasury to eke out one more increase,” said Steven Zeng, an interest-rate strategist at Deutsche Bank. “It is a close call though.”
By Christopher Anstey, Elizabeth Stanton and Michael MacKenzie
