The Zhitong Finance App learned that US Treasury Secretary Bezent's recent more active involvement in the US bond market is prompting Wall Street to re-evaluate the US government's future debt financing strategy. Institutions such as Deutsche Bank, Morgan Stanley, and Citibank believe that as long-term US bond yields remain high for many years, the US Treasury may further adjust the bond issuance structure in the next few months, and in extreme cases it may even reduce the scale of long-term treasury bond issuance.
The key point in time for the market to focus on was the US Treasury's quarterly refinancing announcement on November 4. Analysts believe that compared to directly cutting the issuance of long-term treasury bonds, the more likely situation is that the Ministry of Finance will shift the demand for additional financing more to short-term treasury bills and medium-term treasury bonds with a shorter term, while continuing to expand the repurchase of long-term treasury bonds to reduce the pressure on long-term yields.
For a long time, the US Treasury's debt management policy has emphasized “regularity and predictability” to minimize the impact of policy changes themselves on the world's largest bond market. But Bezent's recent series of initiatives are changing this tradition.
Meghan Swiber, managing director of Bank of America's American Interest Rate Strategy, said that the US bond market is entering “a new world” of US debt management. Ian Lyngen, head of US interest rate strategy at BMO Capital Markets, said that Bezent's recent actions have made the November quarterly refinancing announcement a greater “uncertain factor” than before, and it is currently impossible to rule out the possibility that the Ministry of Finance will cut the scale of long-term treasury bond auctions.
Currently, Bezent still says that the Treasury will not change the regular treasury bond auction schedule until at least the next quarterly refinancing. However, the Ministry of Finance announced an expansion of the bond repurchase program last week, calling this strategy a “treasury twist (treasury twist),” which clearly heightened the market's focus on the November policy adjustments.
Deutsche Bank strategist Steven Zeng and others believe that in the next step, the Ministry of Finance may first further increase the size of a single repurchase of long-term treasury bonds, exceeding the current proposal of at least 4 billion US dollars.
At the same time, the Ministry of Finance may even choose to announce the exact scale the day before implementing the buyback.
This approach will reduce the predictability of repurchase plans and increase the risk of investors shorting long-term US bonds. Since traders are unable to determine in advance when and on what scale the Ministry of Finance will enter the market, the threshold for betting that the price of long-term treasury bonds will fall and the yield will rise will rise significantly.
However, expanding repurchases alone is not enough to fundamentally change the maturity structure of US government debt.
Unlike the Federal Reserve, the US Treasury cannot create money to buy treasury bonds, so the funds used to buy back long-term bonds will ultimately still need to come from other financing channels, including increasing the issuance of short-term treasury notes, or using the Treasury's cash balance in the Federal Reserve account, that is, the Treasury General Account (TGA).
Martin Tobias, an interest rate strategist at Morgan Stanley, believes that the current expansion of bond repurchases is more like a transition measure taken by the Treasury before refinancing in the November quarter. What could really have a significant impact on the market is how the Treasury can shorten the weighted average term of US government debt in the future.
Tobias anticipates that the Ministry of Finance is more likely to gradually increase the issuance of shorter-term treasury bonds while maintaining a basic stability in the scale of long-term treasury bond issuance. But at the same time, he pointed out that over the past week, the possibility that the Ministry of Finance will directly cut the auction scale of long-term treasury bonds has increased.
In fact, the Ministry of Finance has already made minor adjustments to the policy wording before.
In the latest quarterly refinancing announcement, the Ministry of Finance stated that it is studying potential “adjustments” to the future issuance scale of interest-bearing treasury bonds and variable interest rate notes, while the wording previously used was to study a potential “increase.”
Analysts believe that this change in wording has left more policy space for the Ministry of Finance to cut the scale of issuing some long-term treasury bonds in the future.
Some Wall Street institutions have even begun discussing more aggressive debt restructuring proposals.
Citi has postponed its forecast for the US Treasury to expand the treasury bond auction until 2028, and believes there is a tail risk that the Treasury may eventually cancel 20-year US Treasury bonds in the future.
The 20-year US bond was re-introduced during Trump's first term in 2020, but the current performance of treasury bonds with this term is relatively weak. Although the term is shorter than that of 30-year Treasury bonds, the yield is similar to that of 30-year US bonds, which is quite abnormal in the current situation where the yield curve is sloping upward.
Jason Williams, head of US interest rate strategy at Citibank, believes that 20-year US bonds may become the biggest beneficiary of future Treasury adjustments to the issuance structure. Because of their poor performance compared to 10-year and 30-year treasury bonds, the Treasury may prioritize reducing the auction size of 20-year treasury bonds. Citibank is currently recommending that customers increase their 20-year US debt.
The US has also canceled the issuance of long-term treasury bonds in history. The Treasury stopped issuing 30-year Treasury bonds in 2001, but the US government had a fiscal surplus at the time, and financing requirements were far lower than today.
Today, things are completely different. The US government needs large-scale debt financing, so if treasury bonds of a certain term are reduced or even canceled, the financing needs must be covered by bonds of other maturities.
Kevin Flanagan, head of investment strategy at WisdomTree, warned that under the current huge demand for financing, it is mathematically difficult to cut the issuance of long-term treasury bonds and transfer financing to other maturities.
More importantly, if the market believes that the Ministry of Finance is deliberately manipulating yields, the relevant policies may backfire.
This is also the core of the current debate on Wall Street. That is, Bezent can influence the supply and demand of long-term US bonds to a certain extent through repurchases, adjustments to the issuance period, and changes in the auction structure, but these measures cannot eliminate America's huge financial financing needs.
As long-term US bond yields remain high for many years, quarterly refinancing announcements, which did not usually cause much market fluctuations in the past, may now be an important event affecting the global bond market.
Overall, Bezent is pushing the US Treasury to adopt a more proactive approach to debt management, and the November 4 quarterly refinancing announcement may be a key point in the next policy change. Wall Street currently anticipates that increasing short-term financing and expanding the repurchase of long-term treasury bonds is a relatively more likely option, but the possibility of reducing the scale of long-term bond auctions and even adjusting 20-year US bonds has also entered the scope of market discussions.