Bessent just took office and immediately "slapped himself in the face": The U.S. Treasury's quarterly long-term bond issuance scale remains unchanged, and it is expected to maintain this for the rest of the year

Scott Bessent, the U.S. Treasury Secretary who previously criticized former Secretary Janet Yellen's bond issuance strategy, has just contradicted himself upon taking office: the Treasury Department has maintained the previous quarterly bond issuance scale without adjustments and plans to keep this long-term bond issuance scale for a considerable time this year.

On February 5th, Eastern Time, the U.S. Treasury Department announced on its official website that it will issue a total of $125 billion in securities in the so-called quarterly refinancing auction next week. This batch of bonds will refinance approximately $106.2 billion in privately held U.S. Treasury bonds maturing on February 15 this year. This is the fourth consecutive time the Treasury has maintained the quarterly auction scale for long-term bonds. The Treasury stated that the latest batch of $125 billion in refinancing new bonds includes:

• $58 billion of 3-year U.S. Treasury bonds to be auctioned on Tuesday, February 11, at 1 PM Eastern Time,
• $42 billion of 10-year U.S. Treasury bonds to be auctioned on Wednesday, February 12, at 1 PM,
• $25 billion of 30-year U.S. Treasury bonds to be auctioned on Thursday, February 13, at 1 PM.

After deducting the maturing U.S. Treasury bonds, the Treasury expects to raise approximately $18.8 billion in net new cash from this batch of bond refinancing.

The Treasury also stated on Wednesday that it will maintain the issuance scale of floating rate bonds unchanged while continuing to slightly increase the issuance scale of some Treasury Inflation-Protected Securities (TIPS), planning to keep the issuance scale of the 30-year TIPS in February at $9 billion unchanged, expand the issuance scale of the 10-year TIPS in March by $1 billion to $18 billion, and increase the issuance scale of the 5-year TIPS in April to $25 billion.

The Treasury indicated that from February to April, it plans to use Treasury bills to address seasonal or unexpected changes in borrowing demand.

Continues to Reiterate Expectation of No Increase in Bond Issuance Scale "In the Coming Quarters" Despite Market Suggestions to Remove or Modify Guidance

In addition to maintaining the quarterly refinancing auction scale, the U.S. Treasury has reiterated that it will not increase the bond issuance scale in the coming quarters. The Treasury's announcement stated,

The Treasury believes that the current auction scale allows the department to effectively respond to the fiscal outlook and potential changes in the redemption speed and duration of U.S. Treasury bonds held in the Federal Reserve's System Open Market Account (SOMA). “Based on current borrowing demand expectations, the Treasury expects to maintain the auction scale of coupon bonds and floating rate notes (FRNs) unchanged for at least the next few quarters.”

Since the last increase in bond auction scale at the beginning of last year, the Treasury has been repeating this guidance for a year. Moreover, the minutes disclosed by the Treasury on Wednesday show that during the meeting on Tuesday, February 4, external advisors to the Treasury, including market makers and fund managers, actually suggested that the Treasury consider at least modifying the guidance.

The announcement stated that these TBAC advisors “unanimously encouraged the Treasury to consider removing or modifying” the aforementioned forward guidance regarding the bond issuance scale, with some advisors leaning towards completely removing the previous wording to reflect the uncertainty of the outlook, while most advisors supported a more moderate wording change for the guidance However, the Ministry of Finance ultimately maintained its guidance unchanged.

A senior official from the Ministry of Finance later stated that the TBAC only provides suggestions, and the final decision rests with the Ministry of Finance.

The decision by the Ministry of Finance, led by Bessenet, to keep the quarterly medium- and long-term government bond auction scale unchanged aligns with Wall Street's expectations. The market is highly focused on whether the Ministry of Finance has left room for possible bond issuance increases in the second half of this year.

An article from Wall Street Insight this Monday mentioned that several analysts expect the Ministry of Finance may gradually increase the scale of long-term debt auctions starting in November this year, with some predicting that increases could occur as early as August. The article stated that any changes in the Ministry of Finance's wording could trigger market volatility, especially since after the Ministry announced an increase in long-term bond issuance in August 2023, the yield on 10-year U.S. Treasuries briefly approached 5%.

Bessenet has criticized the U.S. Treasury's excessive reliance on short-term debt, arguing that this could distort the market and increase risks. In a column last November, he stated that the Treasury should shift to a more orthodox borrowing structure, namely increasing the proportion of long-term debt. Some Wall Street insiders are concerned that if Bessenet significantly increases long-term debt issuance, it could push up the already high U.S. Treasury yields, thereby affecting the borrowing costs for the entire economy.

Debt ceiling causes significant fluctuations in Treasury bill issuance; when will the Fed end QT affect borrowing demand

Although the Ministry of Finance has maintained the guidance of unchanged bond issuance scale for a considerable time, there are two important factors that may force the Ministry to change its plans in the future. One of them is the debt ceiling. Starting January 2, 2025, the debt ceiling set by Congress for the federal government will restore the effectiveness of limits on all statutory outstanding debts.

In December last year, former Treasury Secretary Yellen revealed in a letter to congressional leaders that due to the reactivation of the debt ceiling, the Treasury would begin to use extraordinary measures in January to avoid a U.S. debt default caused by the debt ceiling restrictions. The Treasury's refinancing bond announcement stated that the Treasury initiated extraordinary measures on January 21 to maintain government funding operations, and also pointed out:

"Before the (Congress) suspends or raises the debt ceiling, the restrictions related to the debt ceiling will lead to greater fluctuations in the issuance of benchmark Treasury bills than normal, as well as a large use of cash management bills."

Another important factor affecting the Treasury's bond issuance is the Federal Reserve's quantitative tightening (QT) actions to reduce its balance sheet. The Fed is currently maintaining a maximum reduction pace of $25 billion per month in its U.S. Treasury holdings, and it is still uncertain when the Fed will pause or further slow down the QT. When the Fed completely exits QT, the Treasury's demand for public borrowing will decrease.

The TBAC reported to the Treasury that market makers currently expect the Fed to end QT this summer, rather than in spring, which will " slightly increase the expectation of the Treasury borrowing from the private sector, as market participants believe the risks lean towards (the Fed's QT) ending later." However, the Federal Reserve needs to assess whether the reserve levels in the banking system are sufficient to determine if it can continue with quantitative tightening (QT). Factors including the debt ceiling situation may complicate this assessment for the Federal Reserve. According to the meeting minutes, market makers generally expect that the Federal Reserve will wait until the first quarter of 2026 or later to expand its balance sheet in order to maintain adequate reserves