The U.S. Treasury maintains its long-term bond issuance unchanged but hints at a possible future increase, with the 10-year U.S. Treasury yield jumping

The U.S. Treasury Department stated on Wednesday that it would not consider increasing the issuance of medium- and long-term U.S. Treasury bonds until early next year, but it has begun to consider increasing the issuance scale of long-term debt in auctions. Analysts believe this move indicates that the U.S. government will rely more on issuing short-term Treasury bills to finance the budget deficit, while the market expects that the scale of U.S. Treasury bond auctions may be significantly raised after early next year, leading to a rapid rise in the yield of 10-year Treasury bonds.

Given the large scale of the U.S. government's fiscal deficit, the market has long anticipated that the Treasury, as the financing arm of the U.S. government, would signal an increase in the issuance scale of U.S. Treasury bonds in the future. In the quarterly refinancing statement released on Wednesday morning, the Treasury finally addressed this issue.

In the quarterly refinancing statement released on Wednesday, the U.S. Treasury stated that it expects to maintain the auction scale of fixed-rate medium- and long-term U.S. Treasury bonds and floating-rate U.S. Treasury bonds unchanged for "at least the next few quarters." This wording has been used since early last year, reflecting that the cost of issuing longer-term U.S. Treasury bonds is higher compared to short-term Treasury bills with maturities of up to one year.

The remaining financing needs for this quarter will be met through weekly regular Treasury bill auctions, Cash Management Bills (CMBs), as well as monthly auctions of fixed-rate medium- and long-term bonds, Treasury Inflation-Protected Securities (TIPS), and 2-year floating-rate notes (FRNs). The actual auction scale for the quarter from August to October 2025, as well as the expected auction scale for the quarter from November 2025 to January 2026, are as follows:

Next week, the Treasury will conduct auctions for 3-year, 10-year, and 30-year Treasury bonds, with a total scale of $125 billion, which has remained the same since May of last year.

Media reports indicate that this practice is widely anticipated in the market. Most traders believe that the Treasury will not increase the issuance scale of medium- and long-term U.S. Treasury bonds until mid-2026 or later to help offset the federal fiscal deficit. Partly due to tariff revenues, the U.S. fiscal deficit has slightly decreased. The Federal Reserve's interest rate cuts have driven down short-term Treasury bond yields, making the Treasury more inclined to issue short-term debt. Currently, the yield on 10-year Treasury bonds is slightly above 4%, while the yield on 12-month Treasury bills is about 3.5%.

The Treasury stated in a press release:

"Looking ahead, the Treasury has begun to preliminarily consider increasing the auction scale of fixed-rate and floating-rate Treasury bonds in the future, focusing on assessing long-term demand trends and evaluating the potential costs and risks of different issuance structures."

Some analysts believe this is the biggest surprise in this statement, indicating that while the auction scale of U.S. Treasury bonds will not increase in the coming months, a significant adjustment will occur afterward. The bond market reacted immediately, with the yield on 10-year Treasury bonds quickly rising to intraday highs.

A senior official from the Ministry of Finance stated to the media that there is still uncertainty regarding when to implement the increase in issuance, and in the meantime, the Ministry is working to provide market participants with as clear guidance as possible. The last time the Ministry announced an increase in the issuance scale of long-term government bonds was in February last year, which will be implemented in April 2024.

As for next week's refinancing auction arrangements, on November 10, $58 billion of 3-year U.S. Treasury bonds will be auctioned, on November 12, $42 billion of 10-year U.S. Treasury bonds will be auctioned, and on November 13, $25 billion of 30-year U.S. Treasury bonds will be auctioned.

John Canavan, chief analyst at Oxford Economics, stated that the Ministry's early mention of the possibility of increasing issuance is

"Not surprising given the deficit outlook, the Ministry will need to increase auction sizes in the future."

"It is more like prudent early management rather than indicating that the increase will come sooner than expected."

Paving the Way for the Future

Analysts believe that although the market generally thinks the Ministry will eventually start paving the way for an increase in long-term government bond issuance—after all, the U.S. government continues to face historically high fiscal deficits, increasing the overall debt burden—the Ministry's announcement today still surprised the market. In fact, it should not be surprising: as the government bonds issued during the record deficits of 2020 and 2021 mature in the coming years, relying solely on issuing government bonds for refinancing will only be enough to cover the maturing portion, while the U.S. fiscal deficit remains at $2 trillion and continues to rise.

The Federal Reserve has recently re-emerged as a potential source of future demand for U.S. Treasury bonds. Last week, the Federal Reserve announced that it would stop reducing its holdings of federal debt assets starting December 1, but it also plans to reinvest the funds from maturing mortgage-backed securities into short-term Treasury bills.

The Fed's interest rate cuts have driven down the yields on the shortest-term U.S. Treasury bonds, giving the Ministry more incentive to issue these maturities. Currently, the yield on 10-year U.S. Treasury bonds is slightly above 4%, while the yield on 12-month Treasury bills is about 3.5%. This is why the refinancing statement mentioned that the Ministry "expects to maintain the issuance scale of benchmark bills until late November" and will make "a slight adjustment to the auction size of short-term Treasury bills in December." Subsequently, "by mid-January 2026, the Ministry expects to increase the auction size of Treasury bills based on fiscal spending conditions."

If the Ministry does not increase the issuance of medium- and long-term U.S. Treasury bonds, the proportion of short-term Treasury bills in the total U.S. Treasury bond stock will rise. Citigroup had anticipated before the announcement on Wednesday that this proportion would exceed 26% by the end of 2027.

Last year, the Treasury Borrowing Advisory Committee (TBAC), composed of dealers, investors, and other market participants, recommended that this proportion should be maintained at around 20% in the long term As of September, this ratio has exceeded 21% and is expected to continue rising in the foreseeable future.

Wall Street Expectations Disrupted

Some Wall Street institutions have delayed their predictions for when the U.S. Treasury will increase the issuance of long-term Treasury bonds, as Treasury Secretary Ben S. Bernanke previously hinted that he did not want the government to lock in higher borrowing costs too early while short-term Treasury bills are cheaper. However, according to today's announcement, he clearly plans to do so in early 2026.

This has led to considerable confusion in the market: In April of this year, JPMorgan's interest rate strategy team anticipated that the Treasury would increase the auction size of fixed-rate Treasury bonds in this refinancing announcement. But in the bank's latest forecast (released before this week's announcement), this timeline has been pushed back to November 2026. Now, JPMorgan has to adjust its forecast again.

In a separate statement, the Treasury Borrowing Advisory Committee (TBAC) indicated that current forecasts may "require an increase in the issuance size of fixed-rate Treasury bonds in fiscal year 2027 (FY 2027)," with the specifics as follows:

In terms of issuance, the committee recommends maintaining the size of nominal coupon Treasury securities and the issuance size of Treasury Inflation-Protected Securities (TIPS) unchanged. The committee discussed potential adjustments to future fixed-rate Treasury bond issuances and the timing of such adjustments. Given the uncertainty in future financing needs, the committee has differing opinions on how the Treasury should adjust its existing forward guidance. The committee believes that based on the latest forecasts, an increase in the issuance of fixed-rate Treasury bonds may be necessary in FY 2027.

The committee noted in its letter to Secretary Bernanke that the current issuance structure seems close to the "efficient frontier," and while the Treasury's recent increase in the proportion of Treasury bills has somewhat reduced expected costs, it has also increased volatility based on the latest results from the Optimal Debt Model. This model is one of many tools the Treasury uses to make issuance decisions.

TBAC wrote:

"While the current mix seems reasonable under the 'Productivity Boom' scenario, other scenarios show that the Treasury faces additional risks. The model indicates that in adverse scenarios, reducing the issuance of Treasury bills, increasing the issuance of belly maturities, and decreasing the issuance of long-term bonds can significantly reduce volatility at a minimal cost."

The committee engaged in "extensive debate" around the trade-off between "reducing debt service costs" and "limiting funding volatility," including how the Treasury should view risk tolerance and risk mitigation. There are significant differences within the committee regarding how the Treasury should adjust its forward guidance on future adjustments to the issuance size and timing of fixed-rate Treasury bonds.

TIPS and Buyback Operations

Finally, the refinancing statement mentioned the recent increase in Treasury bond buybacks, noting that within the maturity range of 10 to 20 years and 20 to 30 years for fixed-rate Treasury bonds, the Treasury plans to conduct four operations during this refinancing quarter, with each operation having a maximum size of $2 billion In other fixed-rate government bond maturity ranges, the Treasury plans to conduct a liquidity support buyback of up to $4 billion. The Treasury also plans to carry out two operations in the 1 to 10-year maturity range of Treasury Inflation-Protected Securities (TIPS), with a maximum of $750 million each, and one operation in the 10 to 30-year TIPS maturity range of up to $500 million.

The Treasury also expects to repurchase up to $38 billion of "off-the-run securities" in different maturity ranges in the next quarter to support market liquidity, and to conduct repurchases of up to $25 billion in the 1 month to 2 year maturity range for cash management purposes.

As announced in the previous quarter's refinancing announcement, the Treasury plans to provide more eligible counterparties with direct buyback access in the first half of 2026, with selection criteria based on their performance in Treasury auctions.

Affected by the unexpected news of "future increases in fixed-rate government bond coupon issuance" in the refinancing statement, the yield on the 10-year Treasury bond not only surged to a new intraday high but also approached the highest level of the past week.