Original Author: Dong Jing
Original Source: Wall Street News
U.S. Treasury Secretary Scott Bessent has adopted a more proactive strategy in national debt management. This shift is upending the long-standing predictability of the U.S. bond market and prompting Wall Street to urgently model potential major adjustments to the government's borrowing strategy in the coming months.
According to a Bloomberg report on August 26th, with last week's announcement of a bond buyback plan dubbed a “Treasury twist” by Bessent, market focus has quickly shifted to the Treasury's quarterly refunding plan scheduled for November 4th. Strategists at Wall Street investment banks such as Bank of America and Deutsche Bank warn that for the $31 trillion U.S. Treasury market, this upcoming announcement has become an unprecedented unknown.
Currently, mainstream Wall Street institutions expect that the Treasury Department may signal in November that future increases in borrowing will be met through short-term Treasury bills and shorter-dated notes, while further expanding the scale of buybacks to ease pressure on long-term yields. Some investment banks have even pointed out that the possibility of the radical option of directly reducing the issuance size of long-term bonds is on the rise.
With long-term Treasury yields hovering near multi-year highs, the Treasury's departure from the long-standing convention of being “regular and predictable” is injecting new volatility into the market. Investors are facing a brand-new era of U.S. debt management and are reassessing their portfolio risk exposures accordingly.
November Refunding Plan Becomes Market 'Unknown'
Bessent's recent moves have shattered the long-standing calm in U.S. policymaking circles. Meghan Swiber, Managing Director of U.S. Rates Strategy at Bank of America Corp, stated that the bond market is entering “a brand new world” of U.S. debt management.
Although Bessent has currently ruled out changes to the regular auction schedule and indicated the Treasury will stick to the current timetable at least until the next refunding announcement, market expectations have already shifted.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, noted that Bessent's actions have effectively turned the November refunding statement into a major unknown. He emphasized that the possibility of scaling back auction sizes can no longer be ruled out.
Furthermore, the Treasury made subtle wording changes in its latest refunding guidance, stating officials are evaluating potential “changes” to future coupon and floating rate note sales, rather than “increases” as stated in previous guidance. Analysts believe this provides more leeway for the Treasury to reduce long-end bond issuance.
Strategy Game: Expanding Buybacks vs. Shortening Duration
According to reports, as a first step in adjustment, the Treasury may focus on its buyback operations. A team of strategists led by Steven Zeng at Deutsche Bank AG believes the Treasury could raise the size of its long-end operations above the initially proposed $4 billion minimum.
Officials could even keep the operation size confidential until the day before the operation, thereby reducing the predictability of the buyback plan and significantly raising the bar for investors looking to short long-end Treasuries.
However, expanded buyback operations alone are unlikely to achieve a substantial shift in the government's debt maturity profile. Unlike the Federal Reserve, the Treasury cannot create money out of thin air to finance its purchases. This means buybacks must ultimately be funded by additional issuance (most likely short-term T-bills) or using cash from the Treasury's account.
Morgan Stanley pointed out that the Treasury's account could provide $80 to $200 billion to fund the buybacks.
Martin Tobias, a rates strategist at Morgan Stanley, stated that expanded buybacks might just be a bridge until the November refunding plan is released. He believes the event that ultimately triggers market volatility will be *how* the Treasury chooses to shorten its weighted average maturity.
Tobias expects the Treasury to gradually increase sales of shorter-dated notes while keeping sales of longer-dated bonds stable, but the risk of directly cutting long-end bond auctions has risen over the past week.
Tail Risk and Controversy of Cutting Long-Bond Issuance
Some strategists are considering more radical reform scenarios.
Citigroup has pushed back its forecast for larger auctions to 2028 and raised the tail risk that the Treasury might eventually eliminate the 20-year bond. This maturity was reintroduced in 2020 by Steven Mnuchin, the first Treasury Secretary of the Trump administration.
Despite its shorter maturity, the 20-year bond currently yields similarly to the 30-year bond, which is paradoxical against the backdrop of the upward-sloping U.S. yield curve.
Jason Williams, head of U.S. rates strategy at Citigroup, stated that given the 20-year bond's underperformance relative to the 10-year and 30-year bonds, the Treasury is very likely to reduce its auction size, and the 20-year bond might benefit the most from any future action.
However, the report noted that directly cutting long-bond issuance faces practical challenges. The Treasury stopped selling 30-year bonds in 2001, but the fiscal backdrop was starkly different then, with budget surpluses reducing the government's funding needs. In the current era of high issuance, any move to eliminate one maturity would force other maturities to absorb that borrowing.
Kevin Flanagan, head of investment strategy at WisdomTree, warned that cutting issuance at the long end of the curve and making up for it elsewhere seems mathematically very difficult. He stated that if the Treasury goes down this path, the market will perceive it as manipulation, which could ultimately backfire.
