Is There Finally Relief for U.S. Treasury Yields? Treasury Hints at Reducing Long-Term Bond Issuance

The U.S. Treasury adjusted its wording on debt issuance this week, triggering market speculation that the government might scale back auctions of 20-year and 30-year Treasury bonds to suppress long-term yields, breaking the market’s long-standing belief that U.S. debt issuance would only continue to expand.

The United States has maintained massive fiscal deficits for years, with the size of its Treasury market more than doubling since 2018 to approximately $31 trillion. In recent years, the Treasury has primarily relied on short-term Treasury bills maturing within one year to meet funding needs, but dealers widely expected the government would eventually need to increase medium- and long-term bond issuance.

On Wednesday, in its quarterly refunding statement, the Treasury said it is assessing "potential future adjustments" to couponed bond auctions, replacing the previous phrase "potential future increases." Given that Treasury Secretary Besent has long viewed the 10-year Treasury yield as a key economic indicator, this change in wording immediately sparked speculation: the Treasury may limit supply of long-dated bonds, focusing new issuance on shorter- to medium-term securities with lower financing costs.

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, believes the statement implies that long-end supply could decline in the future, helping to improve market sentiment along the long end of the yield curve. Long-dated bonds have recently faced multiple pressures, including weak overseas demand, rising global yields, fiscal concerns, and competition from tech giants like Alphabet issuing large volumes of corporate debt to fund artificial intelligence (AI) investments. TD forecasts that the Treasury could begin reducing 20- and 30-year bond auctions as early as May next year, while increasing issuance of 2- to 10-year bonds.

However, Deutsche Bank strategist Steven Zeng argues that given the government’s enormous funding requirements, reducing long-bond issuance is not the base case scenario. The Treasury still needs to raise funds across the entire yield curve. He suggests the wording change may simply be an effort to temporarily soften market backlash against future auction expansions.

Michael Cloherty, strategist at Canadian Imperial Bank of Commerce (CIBC), goes further, stating outright that scaling back certain couponed bond auctions "isn’t even on the table." If short-term issuance were significantly increased to offset reduced long-bond supply, short-end yields could also rise as the Treasury would need to attract more buyers.

In 2023, the U.S. Treasury unexpectedly slowed its pace of long-bond issuance, fueling a major rally in Treasuries. The 30-year yield dropped from a high near 5.18% in October of that year to just above 4% by year-end. Guneet Dhingra, strategist at BNP Paribas, acknowledges that reducing long-bond auctions is indeed one of the few powerful tools available to lower yields. However, she warns that if the Treasury gradually signals such moves, it may lose the surprise impact that delivered strong results in 2023.