Besencher or reshape the U.S. bond issuance strategy? Wall Street is hotly discussing the reduction of long-term U.S. Treasury bond issuance, and the refinancing meeting in November has become key.

U.S. Treasury Secretary Janet Yellen's recent proactive involvement in the U.S. debt market is prompting Wall Street to reassess the government's future debt financing strategy. Institutions such as Deutsche Bank, Morgan Stanley, and Citigroup believe that as long-term U.S. Treasury yields remain at multi-year highs, the Treasury may further adjust its bond issuance structure in the coming months, possibly even reducing the scale of long-term Treasury bond issuance in extreme scenarios. A key date for market attention is November 4, when the Treasury will announce its quarterly refinancing plans. Analysts suggest that instead of directly cutting long-term Treasury bond issuance, a more likely scenario is that the Treasury will redirect new financing needs towards short-term Treasury bills and shorter-term notes while continuing to expand its buyback of long-term bonds to alleviate pressure on long-end yields. For a long time, the Treasury's debt management policy has emphasized being "orderly and predictable," aiming to minimize the impact of policy changes on the world's largest bond market. However, Yellen's recent actions are changing this tradition. Meghan Swiber, Managing Director of U.S. Interest Rate Strategy at Bank of America, stated that the U.S. Treasury market is entering "a whole new world." Ian Lyngen, head of U.S. Interest Rate Strategy at BMO Capital Markets, noted that Yellen's recent actions have made the November quarterly refinancing announcement a larger "unknown" than before, and the possibility of the Treasury reducing the scale of long-term bond auctions can no longer be ruled out. Currently, Yellen has indicated that the Treasury will not change its regular bond auction schedule before the next quarterly refinancing. However, the Treasury announced last week that it would expand its bond buyback program, referring to this strategy as "Treasury twist," significantly increasing market focus on potential policy adjustments in November. Deutsche Bank strategist Steven Zeng and others believe that the Treasury may first further increase the size of its long-term bond buybacks, making it exceed the currently suggested minimum of $4 billion. At the same time, the Treasury may even choose to announce the specific size of buybacks just a day before implementation. This approach would reduce the predictability of the buyback program and increase the risk for investors betting against long-term U.S. Treasuries. Since traders cannot determine in advance when and how much the Treasury will enter the market, the threshold for betting on falling long-term bond prices and rising yields will be significantly raised. However, relying solely on expanding buybacks is insufficient to fundamentally alter the maturity structure of the U.S. government's debt. Unlike the Federal Reserve, the Treasury cannot create money to buy Treasury bonds, so the funds used for long-term bond buybacks will ultimately still need to come from other financing channels, including increasing short-term Treasury bill issuance or utilizing the cash balance in the Treasury's account at the Federal Reserve, known as the General Fund Account (TGA). Morgan Stanley interest rate strategist Martin Tobias believes that the current expansion of the bond buyback program is more of a transitional measure taken by the Treasury ahead of the November quarterly refinancing. What could significantly impact the market is how the Treasury shortens the weighted average maturity of U.S. government debt in the future. Tobias expects that the Treasury is more likely to gradually increase the issuance of shorter-term bonds while keeping the issuance of long-term bonds relatively stable. However, he also pointed out that the possibility of the Treasury directly cutting long-term bond auction sizes has increased over the past week. In fact, the Treasury has already made subtle adjustments to its policy language. In the most recent quarterly refinancing announcement, the Treasury indicated that it is studying potential adjustments to the issuance scale of coupon bonds and floating rate notes, whereas the previous wording was to study potential increases. Analysts believe that this wording change leaves greater policy space for the Treasury to reduce part of its long-term bond issuance in the future. Some Wall Street institutions are even beginning to discuss more aggressive debt structure adjustments. Citigroup has postponed its forecast for the Treasury to expand bond auction sizes to 2028, while also acknowledging a tail risk that the Treasury may ultimately eliminate the 20-year U.S. Treasury bond issuance in the future. The 20-year Treasury bond was reintroduced during Trump's first term in 2020, but currently, this maturity bond has performed relatively weakly. Despite its maturity being shorter than the 30-year Treasury bond, its yield is comparable to that of the 30-year bond, which seems rather unusual given the current upward sloping yield curve. Jason Williams, head of U.S. Interest Rate Strategy at Citigroup, believes that the 20-year Treasury bond may become the biggest beneficiary of the Treasury's issuance structure adjustment in the future, as it has underperformed relative to the 10-year and 30-year bonds, and the Treasury may prioritize cutting the auction size of the 20-year bonds. Citigroup currently advises clients to go long on the 20-year Treasury bond. Historically, the U.S. has also canceled long-term bond issuance. The Treasury ceased issuing the 30-year Treasury bond in 2001 when the U.S. government had a fiscal surplus and financing needs were far lower than today. The situation today is entirely different. The U.S. government needs large-scale debt financing, so if it reduces or even cancels the issuance of a particular maturity bond, the financing needs must be covered by bonds of other maturities. Kevin Flanagan, head of investment strategy at WisdomTree, warned that under the current enormous financing needs, reducing long-term bond issuance and shifting financing to other maturities is mathematically very challenging. More importantly, if the market believes that the Treasury is intentionally manipulating yields, the related policies may backfire. This is also the core of the current debate on Wall Street: Yellen can influence long-term Treasury supply and demand to some extent through buybacks, adjustments in issuance maturities, and changes in auction structures, but these measures do not eliminate the significant fiscal financing demand facing the U.S. As long-term U.S. Treasury yields remain at multi-year highs, quarterly refinancing announcements that typically do not trigger much market volatility may now become significant events affecting the global bond market. Overall, Yellen is driving the Treasury to adopt a more proactive debt management approach, and the quarterly refinancing announcement on November 4 may become a key inflection point for the next policy change. Wall Street currently expects that increasing short-term financing and expanding long-term Treasury buybacks are relatively more likely options, but the possibility of cutting long-term bond auction sizes, and even adjusting the 20-year Treasury bonds, has already entered market discussions.