Wall Street Braces for Largest Adjustment in U.S. Debt Issuance in Years: Long-Term Bonds May Reduce Early, Short-Term Financing Faces Test

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

Following U.S. Treasury Secretary Janet Yellen's recent signals of intervention in the bond market to lower long-term yields, the market widely expects the Treasury to adjust its policy guidance that has maintained stable debt issuance levels, paving the way for future reductions in the issuance of 20-year and 30-year long-term bonds, while increasingly relying on short-term Treasury bills (T-bills) to meet the growing financing demands.

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

Long-Term Bond Issuance Policy May Ease, Focus on 20-Year and 30-Year Bonds

According to Bloomberg, Wall Street traders are preparing for a potential adjustment in the U.S. Treasury's bond issuance policy, which could be the largest since early 2024. Since January 2024, the Treasury has maintained relatively stable guidance on medium- to long-term bond issuance, committing to keep the issuance levels of notes and bonds unchanged for the coming quarters.

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

Several primary dealers expect the Treasury to adjust the wording of its existing policy 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 as early as this month, which would mean a deviation from the previous policy guidance of maintaining stable issuance levels in the quarterly refinancing statement.

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 its bond repurchase operations, 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 repurchase plans is unlikely to have a sufficiently large impact on the market. She pointed out that if the Treasury aims to lower yields, adjusting the bond issuance structure would be a more direct approach.

Yellen Still Concerned 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 long-term U.S. bond yields.

In early October, long-term U.S. bond yields briefly reached their highest levels in over 20 years, raising concerns about government financing costs, debt sustainability, and demand for long-term bonds. Subsequently, Yellen 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 remained above 5.30%, close to the levels seen 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.

Short-Term Financing Proportion Rises to 22%, Risks of Continued Reliance on T-Bills Increase

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 costs. The U.S. government runs an annual fiscal deficit of about $2 trillion, and public debt continues to rise. With the long-term bond issuance levels remaining stable over the long term, the Treasury is increasingly relying on short-term Treasury bills to fill financing gaps.

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

Short-term Treasury bills have a maximum maturity of one year, requiring frequent rollovers upon maturity, which means the Treasury must continuously secure investor absorption. The current weekly auction size 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 bond issuance can temporarily avoid expanding long-term bond supply, but the rising proportion of short-term bonds 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 T-bill demand, reducing long-term bond issuance is not a prudent choice. Treasury officials had previously viewed stablecoins as a new source of T-bill demand, but currently, the demand for bonds from stablecoins has not yet formed a sufficient scale.

Wall Street Divided on Adjustment Magnitude, J.P. Morgan Expects Issuance Levels to Remain Unchanged Until August Next Year

Despite many traders expecting 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 levels. UBS expects that the Treasury will not adjust actual issuance levels 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 few quarters" to "for the next few quarters," thereby providing greater flexibility for adjusting the timing and term structure of issuance.

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

J.P. Morgan's judgment is relatively conservative. The bank's strategist team expects the Treasury to continue to retain the policy statement of maintaining stable issuance levels for the next few quarters and extend this guidance until 2027. According to their forecast, the bond auction size 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 for 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 current issuance guidance's core framework was established by former Treasury Secretary Yellen and has been in place since January 2024. The Treasury signaled a potential adjustment in August this year, subtly changing the wording regarding the future possibility of increasing the issuance of notes and floating-rate bonds to assess potential changes in issuance levels.

Bond Repurchase Policy Will Also Be Updated, Treasury Seeks to Expand Debt Management Tools

In addition to the bond issuance size and term structure, the market will also focus on 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 maximum single transaction size for liquidity support repurchase operations for 10-20 year and 20-30 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 size to $6 billion per transaction.

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

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

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

For this week's quarterly refinancing plan, if the Treasury maintains the existing issuance levels, the total amount for the three benchmark 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 of this statement lies not only in whether to adjust specific auction sizes but also in whether the Treasury will formally change the long-standing policy framework of maintaining stable medium- to 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.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at your own risk.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.