Ahead of a quarterly policy statement on debt strategy Wednesday, most dealers see the Treasury reiterating it expects no increases in note and bond issuance “for at least the next several quarters.” That forward guidance dates back to the Biden administration, and was once criticized by Bessent as designed to tamp down longer-term borrowing costs ahead of the November 2024 election.

Today, it’s President Donald Trump’s Republicans facing midterm elections, with every interest in avoiding any further climb in yields — the potential result of any signal of increased auction sizes. Yields on 30-year bonds last week already hit their highest levels since 2007, making them so costly compared with shorter maturities that many dealers doubt the Treasury will boost their sales at all in coming years.

Bessent since taking office has relied on bills, which mature in up to a year, to meet the government’s increasing borrowing needs. As their rates are lower, that’s helped temper the Treasury’s costs. But the strategy comes with risks: continuing to lean on bills means debt-servicing costs become sensitive to front-end rate shocks, at a time when investors are betting the Federal Reserve will be forced to tighten monetary policy over the coming months.

“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, and waiting longer may only increase the perceived importance — and market impact — of its eventual removal.”

Economists see the federal budget deficit running at roughly a $2 trillion pace for years to come, which means the government will have to borrow an ever-increasing amount.

The department on Monday is due to update its estimate of expected borrowing needs for the current quarter, ahead of Wednesday’s so-called quarterly refunding announcement. In May, it penciled in $671 billion in net borrowing for the three months through September.

Bank of America Corp. calculates that, if the Treasury keeps issuance of coupons, or interest-bearing securities, stable through the 2027 fiscal year, the T-bill share of outstanding debt would hit nearly 25% — the highest since 2004 after leaving out the Covid and global financial crisis shocks.

Since the last refunding in May, dealers have pushed out the date by when they anticipate the Treasury will boost coupon sales, with many gravitating toward May 2027.

As for next week’s refunding auctions, unchanged issuance sizes would mean they will consist of:

• $58 billion of 3-year notes on Aug. 11
• $42 billion of 10-year notes on Aug. 12
• $25 billion of 30-year bonds on Aug. 13

As time goes on, the scale of maturing debt means that current auction sizes wouldn’t be able to raise fresh cash for the Treasury. JPMorgan Chase and Co. analysts see a “funding gap” beginning to emerge in fiscal 2027, which starts Oct. 1. They tally a cumulative gap from 2027 to 2030 of $3.7 trillion.

“From a prudent debt management perspective, we think next week Treasury should remove ‘at least’ from the long-standing forward guidance,” JPMorgan strategists led by Jay Barry wrote in their refunding preview last week. But “there are political dynamics at play,” they said, pointing to the incentive to avert a rise in yields before the election. Bessent has also focused on lowering long-term yields, they noted.

The Treasury didn’t respond to a request for comment on debt-sales guidance and the election.

As for relying on bills, the Treasury has reason to believe strong demand can absorb increased supply, at least for now.

Money-market funds have grown to roughly $8.3 trillion, according to Crane Data LLC. Bessent has also argued that stablecoin issuers will become a source of fresh demand for bills. Meantime, the Fed is expanding its holdings, in part by recycling maturing mortgage securities into bills.

Minority View

Some banks, including Deutsche Bank AG, Wells Fargo and CIBC Capital Markets, do see the Treasury tweaking Wednesday’s guidance in order to tee up an earlier shift to larger coupon sales. While a variety of language could be used, the key would be providing sufficient flexibility for an announcement as soon as February.

Still, conviction in such a change is 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.

But “a change should be coming,” they said, based on fundamentals and past recommendations from the Treasury Borrowing Advisory Committee — a panel of investors, dealers and other market participants.

Whenever the Treasury does eventually raise coupon sizes, most dealers expect it will concentrate on short- and medium-term tenors, rather than on 10-, 20- and 30-year maturities.

Maturity Guidance 

Yields in the so-called belly of the curve are less elevated, with the 5-year rate trading late last week around 4.45% compared with 4.73% in the 10-year and 5.27% 30 years out.

In May, the Treasury said officials are looking at potential coupon increases “with a focus on trends in structural demand and potential costs and risks of various issuance profiles.”

“This statement hints that Treasury is likely to bias any increase in coupon issuance toward the front end of the curve,” TD Securities strategists Gennadiy Goldberg and Molly Brooks wrote in a note.

Dealers will also be on watch for any further word on the Treasury’s interest in potentially investing some surplus cash in the repo market. Officials asked primary dealers in their usual pre-refunding survey about their views on such a move.