U.S. Treasury issuance guidelines may face the largest adjustment since early 2024: long-term issuance likely to be reduced, reliance on short-term debt to rise

According to Zhitong Finance APP, after US Treasury Secretary Janet Yellen unexpectedly showed willingness to intervene in the bond market to suppress yields, Wall Street is preparing for the largest adjustment in US Treasury issuance guidance since early 2024. The market is watching whether the US Treasury will revise its medium- and long-term Treasury issuance guidance in this Wednesday's quarterly refunding statement, paving the way for a reduction in the issuance of ultra-long-term Treasuries in 2027 and an expansion in the auctions of short-term Treasury bills and shorter-maturity notes.

Quarterly Statement May Adjust Guidance

Many dealers expect the US Treasury to adjust its guidance in the quarterly policy statement. For more than two years, this guidance has indicated that the scale of US medium- and long-term Treasury issuance would remain stable. If there is a change in Wednesday's statement, it may signal the Treasury begins to leave policy space for future reductions in 20- and 30-year bond sales.

Some institutions are preparing for more aggressive moves. Citigroup predicts the US Treasury will start cutting 20- and 30-year Treasury issuance this month, which would essentially violate the guidance given in the previous quarterly refunding statement. Notably, just one week after the last planned announcement, Yellen unexpectedly increased the scale of outstanding securities repurchase—a move seen as a response to the yield spike at the time.

April LaRusse, Head of Investment Specialists at Insight Investment, said in an interview that the buyback size is too small to truly change market trends. She stated directly, "If you are in charge of the US Treasury and your main tool is issuance, then when you don't like where yields are, you adjust issuance."

Long-term Yields and Short-term Dependence

The premise for any major adjustment is that long-end yields have retreated from the highest levels in more than two decades reached in early October. However, the yield on the US 30-year Treasury was still above 5.30% last Friday, close to the level in mid-August when Yellen expanded the buyback plan.

Another consideration is that if the US Treasury further relies on short-term Treasury bills with maturities of no more than one year to meet its expanding financing needs, this may eventually test investor tolerance. Due to the quick maturity and ongoing rolling of short-term bills, the US now auctions over $500 billion every week, making the Treasury highly susceptible to market volatility. Last week, the Treasury auctioned a record $839 billion.

Phoebe White, Head of US Rate Strategy at UBS, said that changes to the issuance strategy are "more likely to be an adjustment of guidance rather than immediate action." However, she also pointed out that the Treasury's recent "unconventional" behavior does "increase the likelihood of continued deviation from historical precedent." UBS expects the actual issuance scale will remain unchanged until May next year.

The US Treasury already opened the door to adjusting guidance in August. At that time, officials made a subtle tweak, saying they were assessing "possible changes" in future coupon and floating-rate note sales, compared to the previous description of a potential "increase."

Next Week's Auctions and Institutional Disagreements

For next week's US quarterly refunding auctions, if issuance remains unchanged, the total scale will be $125 billion, including $58 billion of 3-year Treasuries issued on November 9, $42 billion of 10-year Treasuries on November 10, and $25 billion of 30-year Treasuries on November 12.

Since the current guidance was established by Yellen's predecessor, dealers have been expecting medium- and long-term Treasury sales to eventually resume growth. The reason is that public US debt continues to increase, with the government’s annual deficit at about $2 trillion. On Monday, the Treasury will update its latest quarterly borrowing needs estimate.

In preparation for Wednesday's statement, the Treasury polled primary dealers—through a routine pre-refunding questionnaire—on "structural changes" in US Treasury investor demand, and "what changes should be considered for future auction sizes."

In a refunding outlook report, the team led by JPMorgan strategist Jay Barry indicated that the core of the Treasury's actions is being "uncomfortable with yield levels.” Nonetheless, the team expects that the Treasury will maintain the “next several quarters” language through 2027 and keep auction sizes unchanged until next August, after which a series of increases focused on 2- to 10-year securities would begin.

JPMorgan's view contrasts with many dealers anticipating guidance changes. The Barclays team recommends that officials should change the wording from "at least the next several quarters" to just "the next several quarters," believing this would give the Treasury "flexibility" in the timing and makeup of issuance.

Since January 2024, the Treasury has retained similar guidance: "Maintain the scale of coupon-bearing Treasury issuance at least for the next several quarters." While investors occasionally call for this wording to be removed, Bank of America, Goldman Sachs, and UBS are all watching to see if this quarter's statement adjusts related expressions.

Repurchase Program and TBAC under Scrutiny

Observers will also monitor key topics from the US Treasury Borrowing Advisory Committee (TBAC) on Wednesday. This committee, composed of investors, dealers, and other market participants, regularly meets with senior Treasury officials. Any feedback regarding whether the market can continue to absorb an increasing scale of short-term Treasury bill sales may be of particular importance.

As federal borrowing keeps rising but medium- and long-term issuance does not, the proportion of short-term Treasury bills in outstanding debt has steadily increased, reaching about 22% in September—above TBAC’s recommended long-term average of 20% for 2024.

The JPMorgan team believes that given the borrowing scale required in coming years and the early signs of stagnation in short-term Treasury bill demand, it is not prudent to cut long-bond sales. Meanwhile, Treasury officials have promoted the idea that stablecoin purchases of US Treasuries are a new source of demand, but such purchases have yet to occur at any significant scale.

On Wednesday, the Treasury may also announce new guidelines for bond repurchases. Previously, officials increased the repurchase scale for 10- to 30-year Treasuries to $600 million each time—triple the previous amount. Most investors expect officials to maintain this scale and retain the option for adjustments.

Goldman Sachs strategist William Marshall and his team wrote in a report that clarifying repurchases as a tool for managing the maturity profile of outstanding debt could enhance market impact. They believe this move "could help the Treasury become less price-sensitive in its operations."