US Treasury Weighs Long Bond Cuts Ahead of November Refunding

Washington is preparing a potential overhaul of its government borrowing strategy as the US Treasury approaches its quarterly refunding announcement on Wednesday. The proposed adjustments could reduce sales of long-term bonds while increasing short-term borrowing through Treasury bills, as officials seek greater flexibility amid elevated yields and growing federal financing requirements.

The announcement could represent the most significant revision to Treasury issuance guidance since early 2024. Treasury Secretary Scott Bessent has signaled greater willingness to intervene in bond markets, raising expectations that the department may reconsider its longstanding commitment to keeping medium- and long-term securities issuance stable.

Citigroup expects the Treasury to begin cutting sales of 20-year and 30-year bonds this month. Such a move would depart from the previous guidance and could shift more government financing toward shorter-maturity securities.

The pressure comes as the 30-year Treasury yield remained above 5.30% on Friday, despite retreating from highs recorded in early October that exceeded levels seen in more than two decades. Bessent previously expanded the Treasury's long-bond buyback program on August 19, increasing the maximum amount per operation from $2 billion to at least $4 billion.

April LaRusse, head of the investment specialists team at Insight Investment, questioned whether buybacks could meaningfully influence market conditions.

"Buybacks are too small to really move the needle," LaRusse said.

She argued that changing the composition of government borrowing offers a more direct mechanism for influencing long-term yields.

"If you're running the U.S. Treasury and your primary tool is issuance, then when you don't like where yields are, you adjust issuance," LaRusse said.

In a separate assessment, LaRusse emphasized the relationship between issuance decisions and borrowing costs.

"If you're running the Treasury and your main power is issuance, if you don't like where the yields are, you adjust your issuance," she said.

Increasing reliance on Treasury bills presents another challenge. These securities mature within one year and require frequent refinancing, potentially exposing the government to changes in investor demand and market conditions.

Treasury bills already represent approximately 22% of outstanding US government debt, exceeding the 20% level previously recommended by the Treasury's borrowing advisory committee as an average benchmark. Weekly bill auctions exceed $500 billion, while the previous week's total Treasury auction volume reached a record $839 billion.

Phoebe White, head of US rates strategy at UBS Group, expects any immediate development to focus primarily on policy language rather than changes to auction volumes.

"Guidance is more likely than immediate action," White said.

She also pointed to the possibility of further departures from established Treasury practices.

"Unconventional," White described the department's recent behavior, adding that it increases the likelihood that future decisions will depart from historical precedent.

UBS expects actual issuance sizes to remain unchanged until May 2027. The bank's assessment suggests that adjustments to official guidance could precede changes to the auction calendar by several months.

The Treasury had already softened its language in August by referring to possible future "changes" in coupon-bearing and floating-rate note sales rather than potential "increases." That adjustment indicated greater flexibility in determining future borrowing volumes.

For its latest dealer consultation, the Treasury asked primary dealers about "structural changes" in investor demand for government securities and "what changes should be considered for future auction sizes."

JPMorgan strategists led by Jay Barry identified the department's concerns about borrowing costs as a central factor behind the potential policy adjustment.

"Discomfort with the level of yields," the JPMorgan team wrote in its refunding outlook.

Despite that assessment, JPMorgan expects officials to retain the "next several quarters" guidance through 2027. The bank forecasts unchanged auction sizes until August 2027, followed by increases concentrated in securities with maturities ranging from two to 10 years.

Barclays takes a different position, recommending that officials replace the phrase "at least the next several quarters" with "the coming quarters." The proposed wording would give the Treasury greater discretion over the timing and composition of future debt sales.

The existing commitment to maintain stable coupon-bearing issuance has remained in place since January 2024. Other institutions, including Bank of America, Goldman Sachs Group and UBS, are also monitoring whether Wednesday's statement introduces a formal change.

The upcoming refunding auctions are scheduled to total $125 billion if issuance remains unchanged.

The Treasury will also update its quarterly borrowing estimate on Monday. Government borrowing requirements remain substantial, with the annual federal deficit estimated at approximately $2 trillion as public debt continues to expand.

JPMorgan expects the Treasury to preserve its existing "next several quarters" language, while Barclays favors replacing "at least the next several quarters" with more flexible wording. The Wednesday refunding statement will provide the next official indication of the department's issuance plans.