U.S. Treasury Secretary Scott Bessent has taken a more active approach to federal debt management, shaking a market long used to predictable Treasury issuance and prompting Wall Street to rethink how the government may fund itself in the coming months.
Bloomberg reported on Aug. 26 that the market’s attention has shifted quickly to the Treasury’s Nov. 4 quarterly refunding announcement after last week’s launch of a bond buyback plan that Bessent described as a "Treasury twist." For the $31 trillion U.S. Treasury market, strategists at firms including Bank of America and Deutsche Bank say the next borrowing statement has become an unusually large unknown.
November refunding plan now sits at the center of market expectations
Wall Street’s baseline view is that the Treasury could use the November announcement to signal that future increases in borrowing will be concentrated in Treasury bills and shorter-dated notes, while also expanding buybacks to ease pressure on long-term yields.
Some banks are going further. They now see a greater chance that the Treasury may eventually cut the size of long-dated bond issuance directly.
With long-term Treasury yields still hovering near multiyear highs, the department’s willingness to move away from the long-standing "regular and predictable" approach has introduced a fresh source of volatility. Investors are adjusting portfolio risk as a result.
Meghan Swiber, managing director for U.S. rates strategy at Bank of America Corp, said the bond market is entering "a whole new world" of U.S. debt management.
Bessent has ruled out immediate changes to the regular auction schedule and said the Treasury would stick to its current timetable at least until the next refunding announcement. Even so, market expectations have already shifted.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said Bessent’s recent actions have effectively turned the November refunding statement into a major unknown. In his view, a reduction in bond auction sizes can no longer be dismissed.
The Treasury also made a subtle wording change in its latest borrowing guidance. Officials said they were evaluating possible "changes" in future coupon and floating-rate note sales, replacing earlier language that referred to possible "increases." Analysts see that as giving the department more room to reduce issuance at the long end.
Buybacks and maturity shortening are becoming the main areas of debate
As an initial step, the Treasury may focus on buyback operations. A Deutsche Bank AG strategy team led by Steven Zeng said the Treasury could lift the size of long-end operations above the originally suggested minimum of $4 billion.
Officials could even keep the operation size undisclosed until the day before execution, making the program less predictable and raising the bar for investors looking to short long-dated Treasuries.
Still, larger buybacks on their own would be hard-pressed to deliver a meaningful shift in the government’s debt maturity profile. Unlike the Federal Reserve, the Treasury cannot create funds to finance purchases. That means buybacks would ultimately need to be funded either through additional issuance — most likely Treasury bills — or by using cash from the Treasury’s own account.
Morgan Stanley said the Treasury General Account could provide between $80 billion and $200 billion for buybacks.
Martin Tobias, a Morgan Stanley rates strategist, said expanded buybacks may serve mainly as a bridge until the November refunding plan arrives. He argued that the move most likely to jolt the market would be the method the Treasury uses to shorten its weighted average maturity.
Tobias expects the department to increase sales of shorter-dated notes gradually while keeping longer-dated bond sales steady. Even so, he said the risk of direct cuts to long-end bond auctions has risen over the past week.
Cuts to long-end issuance and the 20-year bond are now part of the discussion
Some strategists are considering more aggressive changes. Citigroup has pushed back its forecast for larger auction sizes to 2028 and raised the tail risk that the Treasury could eventually eliminate the 20-year bond.
The 20-year Treasury was reintroduced in 2020 by Steven Mnuchin, the first Treasury secretary of the Trump administration. Although it has a shorter maturity than the 30-year bond, its yield is currently similar to the 30-year yield, an unusual setup with the U.S. yield curve sloping upward.
Jason Williams, head of U.S. rates strategy at Citi, said the 20-year bond has traded poorly relative to the 10-year and 30-year sectors. On that basis, he said the Treasury is likely to reduce auction sizes in that tenor, and the 20-year could end up seeing the biggest benefit from any future action.
Direct long-bond cuts would still face practical limits
Bloomberg also noted that reducing long-dated issuance outright would be difficult in practice. The Treasury stopped selling 30-year bonds in 2001, but the fiscal backdrop then was very different because budget surpluses had lowered federal financing needs.
Today, issuance remains heavy. Any decision to eliminate one part of the curve would force other maturities to absorb that borrowing instead.
Kevin Flanagan, head of investment strategy at WisdomTree, said it appears mathematically difficult to reduce issuance at the long end and make up the difference elsewhere. He added that if the Treasury takes that route, the market may see it as manipulation, a response that could backfire.