Fearing to Spook Bond Market Before Midterms, U.S. Treasury May Delay Signaling Debt Expansion

JPMorgan strategists anticipate that the U.S. Treasury will likely maintain its current guidance on Treasury auction sizes in next week's quarterly refunding announcement, avoiding any signal of expanded long-term government bond issuance that could spook the bond market and push up government borrowing costs ahead of the November midterm elections.

Led by Jay Barry, JPMorgan's team estimates that the U.S. government will face a $3.7 trillion funding gap over the next four fiscal years. To meet the Treasury's stated goal of 'prudent debt management,' officials should technically revise long-standing language by removing the word 'at least' from the current phrasing—'auction sizes are expected to remain stable for at least the next few quarters'—to allow room for future increases in issuance.

However, JPMorgan believes political considerations may prompt the Treasury to temporarily maintain the existing wording. If the Treasury changes its language next week, markets could interpret it as a sign that increased long-term bond supply is imminent, prompting investors to demand higher term premiums, further pushing up long-term yields and steepening the yield curve.

U.S. long-term bond yields are already near their highest levels since Trump's return to office. Treasury Secretary Besent has previously publicly linked the debt issuance plan to yield levels, repeatedly emphasizing the importance of keeping long-term borrowing costs low.

JPMorgan notes that with only about three months remaining until the November midterm elections, long-term yields continue to rise. Under these circumstances, the Treasury may be reluctant to clearly signal an upcoming increase in long-term bond supply, avoiding bond market volatility that could influence the election. Rising gasoline prices due to the U.S.-Iran conflict have already pressured Trump's administration approval ratings, intensifying scrutiny over whether Republicans can maintain control of Congress.

Notably, the Treasury's quarterly refunding statement for November is scheduled for the day after the midterm elections. JPMorgan argues that given the proximity in timing and the current political sensitivity, the Treasury may delay revising its issuance guidance until 2027.

The bank warns that if the word 'at least' is removed next week, market reactions could resemble those in August 2023, when investors demanded higher term premiums to absorb increased long-term bond supply, further pushing up long-term yields. Given the current environment, the likelihood of the Treasury maintaining its existing forward guidance continues to rise.