Wall Street braces for the largest adjustment in U.S. Treasury issuance in years: long-term bonds may see a reduction in quantity ahead of schedule, while the proportion of short-term debt financing faces a test

The U.S. Treasury is about to announce the new quarterly refinancing statement, and Wall Street is closely watching whether the U.S. government bond issuance strategy will undergo its largest adjustment since 2024.

After U.S. Treasury Secretary Janet Yellen has repeatedly signaled intervention in the bond market and efforts to lower long-term yields, the market generally expects that the Treasury may adjust its policy guidance to maintain stable government bond issuance, paving the way for future reductions in the issuance of 20-year and 30-year long-term bonds, while relying more on short-term Treasury bills (T-bills) to meet the growing financing demand.

However, there are still differences in the market regarding the timing and extent of the adjustments. Some Wall Street institutions expect the Treasury to directly announce a reduction in long-term bond issuance this week; others believe that a more likely scenario is a shift towards flexible policy guidance, with the actual issuance scale remaining unchanged for the time being. Meanwhile, the increasing proportion of short-term financing also poses new challenges for the Treasury's market absorption capacity.

### Long-term bond issuance policy may loosen, with 20-year and 30-year bonds in focus

Bloomberg reports that Wall Street traders are preparing for the U.S. Treasury's potential announcement of the largest bond issuance policy adjustment since early 2024. Since January 2024, the Treasury has maintained relatively stable medium- and long-term bond issuance guidance, committing to keep the issuance scale of notes and bonds unchanged for the next several quarters.

However, this policy may change in the quarterly refinancing statement to be announced on Wednesday, November 4.

Several primary dealers expect the Treasury to adjust the existing policy wording to open up space for reducing long-term bond issuance by 2027, while compensating for financing gaps by increasing the issuance of Treasury bills and shorter-term bonds.

Citigroup's forecast is more aggressive. The bank expects the Treasury to start reducing the issuance of 20-year and 30-year bonds this month, which would mean a deviation from the previous quarterly refinancing statement's commitment to maintain stable issuance.

Yellen's recent actions have also heightened market vigilance regarding a potential policy shift. Just a week after the last quarterly refinancing plan was announced, the Treasury unexpectedly expanded the scale of bond repurchases, which the market viewed as a response to the sharp rise in long-term yields.

April LaRusse, head of investment experts at Insight Investment, believes that relying solely on the repurchase plan is unlikely to have a sufficiently large impact on the market. She points out that if the Treasury wants to lower yields and the issuance policy is its primary tool, then adjusting the structure of bond issuance is a more direct approach.

### Yellen still has concerns about yields, but long-term bond yields have retreated from highs

An important backdrop prompting the market to reassess the Treasury's issuance strategy is Yellen's discomfort with the level of U.S. long-term bond yields.

At the beginning of October this year, U.S. long-term bond yields briefly reached their highest level in over 20 years, raising concerns in the market about government financing costs, debt sustainability, and long-term bond demand. Yellen subsequently expanded bond repurchase operations, further reinforcing market expectations that the Treasury might influence yields through debt management measures.

However, whether the Treasury will take significant adjustment actions this week still depends on the recent market environment. Since the peak in early October, long-term U.S. bond yields have retreated somewhat, but Bloomberg noted that as of last Friday, the 30-year U.S. bond yield was still above 5.30%, close to the level when Yellen expanded repurchase operations in August.

Therefore, although yields have retreated from their highs, the Treasury's concerns about long-term financing costs have not completely dissipated.

### Proportion of short-term financing rises to 22%, increasing risks of reliance on Treasury bills

If the Treasury chooses to reduce long-term bond issuance, the most direct alternative would be to further increase the issuance of short-term Treasury bills.

However, this financing strategy is not without cost. The U.S. government has an annual fiscal deficit of about $2 trillion, and public debt continues to rise. With the long-term bond issuance scale remaining stable for an extended period, the Treasury is increasingly relying on short-term Treasury bills to fill financing gaps.

As of September, Treasury bills accounted for about 22% of the U.S. marketable government bonds, exceeding the long-term average level of 20% recommended by the Treasury Borrowing Advisory Committee (TBAC) for 2024.

The maximum maturity of short-term Treasury bills is no more than one year, requiring frequent rollovers upon maturity, which means the Treasury must continuously secure investor absorption. The current weekly auction scale of Treasury bills has exceeded $500 billion, with last week setting a record of $839 billion.

This also puts the U.S. Treasury in a dilemma: increasing short-term issuance can temporarily avoid expanding long-term bond supply, but the rising proportion of short-term debt may gradually test investors' absorption capacity and make government financing more susceptible to changes in market liquidity.

J.P. Morgan strategists previously pointed out that considering the enormous financing needs of the U.S. in the coming years and the initial signs of a slowdown in Treasury bill demand, reducing long-term bond issuance is not a prudent choice. Treasury officials had previously viewed stablecoins as a new source of Treasury bill demand, but the current demand for government bond purchases from stablecoins has not yet formed a sufficient scale.

### Wall Street has differing views on the extent of adjustments, J.P. Morgan expects stable issuance until August next year

Although many traders expect the Treasury to adjust its issuance guidance, major institutions on Wall Street have not reached a consensus on the timing and extent of policy changes.

Phoebe White, head of U.S. interest rate strategy at UBS, believes that this week is more likely to see an adjustment in policy guidance rather than an immediate change in actual issuance scale. UBS expects that the Treasury will not adjust the actual issuance scale at least until May next year.

The Barclays strategist team suggests that the Treasury change the wording in the original guidance from "at least for the next several quarters" to "for the next several quarters," thereby providing greater flexibility for adjusting issuance timing and term structure.

This seemingly minor wording change could mean that the Treasury is no longer committing to maintaining stable issuance for the next several quarters but is leaving room for flexible adjustments based on market demand and financing conditions.

J.P. Morgan's assessment is relatively conservative. The bank's strategist team expects the Treasury to continue to retain the policy statement of maintaining stable issuance for the next several quarters and to extend this guidance until 2027. According to their forecast, the bond auction scale will remain unchanged at least until August next year, after which it will gradually increase, with new issuances mainly focused on 2-year to 10-year bonds.

J.P. Morgan's forecast contrasts with the expectations of many traders regarding a policy shift. Institutions such as Bank of America, Goldman Sachs, and UBS are all paying attention to whether the Treasury will adjust its existing guidance.

It is worth noting that the core framework of the current issuance guidance was established by former Treasury Secretary Yellen and has been in place since January 2024. The Treasury signaled an adjustment in August this year, subtly changing the previous wording regarding the potential increase in the issuance of notes and floating-rate bonds to assess possible changes in issuance scale in the future.

### The bond repurchase policy will also be updated, as the Treasury seeks to expand debt management tools

In addition to the scale and term structure of bond issuance, the market will also pay attention to the Treasury's latest statements on the bond repurchase plan this week.

In August this year, the U.S. Treasury announced that it would at least double the single transaction cap for liquidity support repurchase operations for 10- to 20-year and 20- to 30-year bonds from $2 billion to $4 billion, effective from September 9 until November 4. Bloomberg reported that the Treasury has recently increased the relevant repurchase scale to $6 billion per transaction.

The market generally expects the Treasury to continue to maintain a high repurchase scale while retaining the flexibility to adjust based on market conditions.

Goldman Sachs' strategist team believes that if the Treasury clearly incorporates repurchases into its toolbox for managing the maturity structure of outstanding government bonds, it may further enhance the impact of repurchase operations on the market and create conditions for the Treasury to reduce price sensitivity in repurchase operations.

Additionally, the market will closely monitor the discussion results from the Treasury Borrowing Advisory Committee (TBAC). This committee, composed of investors, primary dealers, and other market participants, provides debt management advice to the Treasury. Feedback from this meeting regarding whether the market can continue to absorb larger-scale Treasury bill issuances is particularly noteworthy.

For this week's quarterly refinancing plan, if the Treasury maintains the current issuance scale, the total amount of benchmark government bond auctions next week will reach $125 billion, including:

November 9: $58 billion in 3-year bonds;

November 10: $42 billion in 10-year bonds;

November 12: $25 billion in 30-year bonds.

The U.S. Treasury will announce the quarterly refinancing statement and related policy documents on Wednesday, November 4. For the market, the key aspect of this statement is not only whether to adjust specific auction scales but also whether the Treasury will formally change the long-standing policy framework of maintaining stable medium- and long-term bond issuance, and how it will balance long-term financing costs, short-term debt rollover risks, and market absorption capacity in the future.

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