Wall Street Stands Guard as Bessent Strikes Again: Aftereffects of August's "Treasury Turnaround" Persist, November Refinancing Notice Could Be the Next Flashpoint

According to Wisdom Finance APP, Wall Street traders were caught off guard in August by U.S. Treasury Secretary Scott Besant’s sudden increase in purchases of old bonds. Now, they are preparing for more intervention measures. As the Treasury is set to update its debt management plan in November, key clues could emerge as soon as Friday.

The “Treasury twist” introduced by Besant was initially aimed at addressing the surge in U.S. yields—which is a sore spot for the Trump administration that has promised to lower borrowing costs—and the move did work at first. However, Besant’s intervention effectively tore up the Treasury’s decades-long rule of “regular and predictable” operations, a principle designed to achieve the lowest debt cost over time.

From a macro perspective, this move has sparked debate: does such an injection of uncertainty ultimately make the market more volatile? From a more practical point of view, it has made Wall Street more alert to potential further interventions by the Treasury in the upcoming November quarterly refunding announcement—which happens to be released the day after the midterm elections.

This Friday, major bond dealers will receive a questionnaire from the Treasury ahead of the refunding. Market watchers say the nature of the questions could serve as a “Rorschach test” (a psychological projection test, used metaphorically for interpreting policy signals) for interpreting Besant’s preferences.

“You’ve already signaled to the market that current yield levels are problematic,” said Vishal Khanduja, head of Broad Markets Fixed Income at Morgan Stanley Investment Management. “That’s why we believe the next two refundings—right after the November midterm elections—will be critical turning points.”

Martin Tobias, a strategist in Morgan Stanley’s banking division, said the Treasury has several options. The most conventional approach is to keep things as they are: maintain the current auction sizes for at least the next few quarters and do not adjust forward guidance, as was done in August. Another option is to revise issuance guidance by ruling out increases in longer-term securities and instead focus on boosting two- to seven-year maturities.

There’s also another choice—the least conventional—which is to explicitly state just how large the proportion of short-term Treasury bills can be. Although the share of short-term bill issuance has been rising, officials have never clarified what upper limit they are willing to tolerate.

For Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, the optimal solution from a taxpayer perspective would be to raise funds by issuing bonds with maturities of around five years, rather than ultra-long 30-year bonds.

“If your goal is to stop yields from rising, then you have to deploy highly innovative methods,” he said.

A Treasury spokesperson did not immediately respond to a request for comment.

Market participants believe all options are possible, as both U.S. and global long-term benchmark yields are near their highest levels in decades. Rising oil prices and the Federal Reserve’s resumption of rate hikes—reflecting economic expansion accompanied by persistent inflation—have jointly pushed yields higher. At the same time, huge AI hyperscale companies have borrowed massively to fund their explosive growth, triggering global competition for capital.

All this is happening as the U.S. annual interest spending has, for the first time, surpassed $1 trillion, with the cost of debt service now exceeding the defense budget, making it more challenging to finance the government. While Besant has limited room to significantly lower borrowing costs, he claims to have a “massive toolbox” and hints at using all available measures to curb long-term yields.

Wall Street will also get another chance to express its views: the Treasury Borrowing Advisory Committee (TBAC), made up of dealers and investors, will hold a quarterly meeting with the Treasury just prior to the November announcement. Though Besant is not obliged to adopt the group’s recommendations—he even refers to himself as “the final decision maker”—he still finds it valuable to hear market opinions before introducing new policies.

“TBAC still possesses extensive expertise and experience. I think it’s wise for Besant to listen and take their advice into consideration,” said Stephen Douglas, chief economist at NISA Investment Advisors and former New York Fed staffer. “But this administration and this Treasury Secretary’s policy goals are radically different from previous governments. They will only pursue what they themselves believe is correct.”

Looking back to August, the Treasury made a subtle change to its guidance, saying officials were assessing potential “changes” in future coupon-bearing and floating-rate notes, rather than merely “increases”—a move that made room for cuts in 20-year and 30-year bond supply. Citigroup says Friday’s dealer survey may signal reduced long-term bond issuance, and Besant may cite weak pension fund demand for Treasuries (possibly caused by increased long-end corporate bond issuance) as a rationale for scaling back or canceling 20-year bonds.

Cutting auctions of long-term coupon Treasuries means the Treasury would have to further boost supply of short-term bills, or possibly introduce a new product, such as a one-year floating-rate note linked to the secured overnight financing rate (SOFR). In the first quarter of this year, Treasury officials had asked dealers whether such securities should be considered.

Wells Fargo strategists said last month that it was an “appropriate time” to revisit this idea, noting it would provide money market funds—the biggest buyers of short-term bills—with an alternative route to invest in short-duration government debt.

Heavy issuance of short-term bills has long been a key aspect of the Treasury’s debt financing strategy, a practice that dates back to Janet Yellen’s tenure as Treasury Secretary. But as the share of short-term bills rises above 22%, this reliance is indeed causing concern on Wall Street. Now that the Federal Reserve has resumed raising rates for the first time in three years—with the market expecting another 0.84 percentage point hike in the coming year—the cost of issuing short-term bills seems destined to climb.

Still, some in the market don’t see more bill issuance as a bad thing.

“There’s still room to increase short-term bill issuance,” said Joe LaVorgna, chief economist for North America at SMBC Nikko Securities, who also served as an adviser to Besant during Trump’s first year. “We can cut long-end supply and coordinate with the Fed, since they have discussed holding only a short-term bill portfolio. Thus, increasing bill supply has limited market impact, because their trading prices are close to the federal funds rate, investors will digest coupon supply, and all parties can accept it.”

Vishal Khanduja from Morgan Stanley Investment Management is not opposed to change. He believes the Treasury should double repo operations and consider cutting long-term auction sizes in the upcoming refunding. But he cautions against causing further surprises.

“The Treasury’s policy predictability must rise significantly,” he said. “With massive levels of Treasury issuance, what you absolutely want to avoid is huge supply with erratic policy that alienates bond buyers.”