To The Moon

Bond market participants widely anticipate that the U.S. Treasury will avoid making major adjustments to its bond issuance plan when it releases a key quarterly refunding statement on Wednesday. However, recent aggressive moves by the Trump administration in other financial areas have kept investors on alert for potential surprises aimed at pushing down yields. The market expects the size of next week's so-called quarterly refunding bond auctions to be $1.25 trillion, a level maintained since May 2024, marking the longest period of stability since the mid-to-late 2010s when the total volume was less than half of the current amount. The Treasury may also reiterate its previous guidance that it aims to keep coupon-bearing bond issuance stable for "at least the next several quarters." Although Treasury Secretary Scott Beshear hinted before taking office that he favored shifting more issuance toward longer-dated bonds, elevated yields have made this approach unattractive. The 10-year Treasury yield, a key market indicator he focuses on, sits around 4.25%, more than 80 basis points higher than the 12-month Treasury bill yield. The federal budget deficit implies that the Treasury will eventually need to increase auction sizes for bonds other than Treasury bills (which mature in one year or less). The debate among market participants centers on whether Beshear's team will wait until 2027 to take this step, or whether it might even reduce issuance of the longest-dated bonds to suppress their yields. Weakening demand from global investors for long-duration securities like the 30-year bond has prompted governments in Europe and Japan to scale back such issuance, raising questions about whether the U.S. might follow suit. "The real focus is whether, given strong demand for Treasury bills, they might consider reducing coupon-bearing bond issuance," said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas. While he expects auction sizes to remain unchanged for the next quarter, he suggested the government could potentially discontinue the 20-year bond auction, which was reintroduced in 2020, due to tepid demand. The Federal Reserve's announcement in December of a larger-than-expected Treasury bill purchase program could provide some room for the Treasury to increase bill issuance. This decision, related to bank reserve management rather than monetary policy, involves the Fed purchasing $40 billion in T-bills monthly until April, thereby reducing the amount the Treasury needs to sell to private investors. Friday's nomination by former President Trump of Kevin Warsh to potentially lead the Fed in May has also refocused attention on the central bank's future role in the bond market. The former Fed governor has previously called for a "new accord" with the Treasury to clarify the Fed's strategy for managing its bond portfolio, though he has not specified the details. Any hint from the Treasury on Wednesday that it plans to cut bond issuance would surprise the market. In its November refunding statement, the Treasury indicated it had "begun preliminary consideration" of future increases to coupon-bearing debt issuance, with a focus on "assessing structural demand trends and weighing the costs and risks of different issuance structures." Since then, former President Trump has taken unconventional actions in response to voter concerns about the cost of living, including housing-related issues. Recent moves include ordering large-scale purchases of mortgage-backed securities while pushing for caps on credit card interest rates. "Naturally, investors are asking whether the Treasury is considering a more proactive shift in debt management strategy to help achieve the government's goal of lowering long-term yields," wrote a team of J.P. Morgan rates strategists led by Jay Barry in a preview of this week's issuance statement. "We've even heard some speculation, such as potentially eliminating the 20-year bond auction entirely, or even reducing 30-year issuance while increasing Treasury bill or 2-year note auction sizes," said Ben Jeffery, a U.S. rates trader at BMO Capital Markets. Any sudden strategic shift would conflict with the Treasury's long-standing principle of "regular and predictable" issuance. Beshear himself emphasized this principle multiple times during his appearance at an annual Treasury market conference last November. For next week's refunding auctions, dealers generally expect the following schedule: February 10: $58 billion in 3-year notes; February 11: $42 billion in 10-year notes; February 12: $25 billion in 30-year bonds.