Treasury Holds Bond Issuance Steady as T-Bill Share Nears 25%

The Treasury on Wednesday held note and bond auction sizes unchanged for at least the next several quarters, matching Wall Street expectations and extending a short-term strategy pushing T-bills toward their highest share since 2004.

"It behooves Treasury to open up some optionality by tweaking its guidance," said Blake Gwinn, head of US rates strategy at RBC Capital Markets. "This would come with the risk of pushing up yields. But this shift will come sooner or later."

The quarterly refunding statement confirmed $58 billion of 3-year notes for Aug. 11, $42 billion of 10-year notes for Aug. 12, and $25 billion of 30-year bonds for Aug. 13. Bank of America calculates that if coupon issuance stays flat through fiscal 2027, T-bills would reach nearly 25 percent of outstanding debt — the highest since 2004 excluding pandemic and financial crisis anomalies. The Treasury Borrowing Advisory Committee recommends an average ratio of about 20 percent.

The decision carries long-term consequences. JPMorgan analysts see a "funding gap" emerging in fiscal 2027, with a cumulative $3.7 trillion shortfall from 2027 to 2030. Economists project the federal deficit running at roughly $2 trillion annually for years, forcing the government to borrow more even as current auction sizes won't raise fresh cash once maturing debt grows.

Treasury Secretary Scott Bessent's debt-management team has consistently rebuffed Wall Street suggestions to adjust its forward guidance on coupon issuance. The current language — no increases in note and bond sales "for at least the next several quarters" — dates back to the Biden administration, when Bessent criticized it as designed to suppress long-term borrowing costs ahead of the November 2024 election. Now it's President Donald Trump's Republicans facing midterm elections, with every interest in avoiding further yield increases.

Yields on 30-year bonds last week reached their highest levels since 2007, making long-dated issuance costly compared with shorter maturities. The 5-year yield traded around 4.45 percent late last week, versus 4.73 percent for the 10-year and 5.27 percent for the 30-year.

T-Bill Reliance Deepens

Since taking office, Bessent has leaned on bills — securities maturing in up to one year — to meet the government's growing borrowing needs. Their lower rates have helped temper Treasury costs, but the strategy carries risks: continuing to rely on bills makes debt-servicing costs sensitive to front-end rate shocks, at a time when investors are betting the Federal Reserve will be forced to tighten monetary policy in coming months.

The Treasury has reason to believe demand can absorb increased bill supply, at least for now. Money-market funds have grown to roughly $8.3 trillion, according to Crane Data LLC. Bessent has argued that stablecoin issuers will become a new source of demand for bills, while the Fed is expanding its holdings in part by recycling maturing mortgage securities into bills.

Minority View on Guidance Change

Some banks — including Deutsche Bank, Wells Fargo, and CIBC Capital Markets — had expected the Treasury to tweak Wednesday's guidance to prepare for an earlier shift to larger coupon sales. The key would be providing sufficient flexibility for an announcement as soon as February. But conviction in such a change was low.

"Would we be shocked if Treasury punted on the language once again? Not at all, particularly because the November refunding announcement will occur one day after Election Day," said the Wells Fargo team led by Michael Pugliese.

Whenever the Treasury does eventually raise coupon sizes, most dealers expect it to concentrate on short- and medium-term tenors rather than on 10-, 20-, and 30-year maturities. TD Securities strategists Gennadiy Goldberg and Molly Brooks noted that the Treasury's May statement — which said officials are studying potential coupon increases "with a focus on trends in structural demand" — hints that any increase would be biased toward the front end of the curve.

The Treasury is also expected to update its borrowing needs estimate for the current quarter. In May, it penciled in $671 billion in net borrowing for the three months through September.

This article is for informational purposes only and does not constitute investment advice.