Wall Street braces for Bessent to strike again: fallout from August "Treasury twist" lingers as November refunding announcement looms as the next flashpoint.

Wall Street traders, caught off guard by Treasury Secretary Scott Bessent's surprise August move to buy back older debt, are now bracing for more interventions. Key clues could emerge Friday as the Treasury prepares to update its debt management plan in November. Bessent's "Treasury twist" was initially designed to address surging U.S. yieldsa pain point for the Trump administration, which has promised to lower borrowing costsand it initially worked. But by intervening in this way, Bessent also effectively tore up the Treasury's decades-old "regular and predictable" operating principle, which was meant to achieve the lowest debt costs over time. From a macro perspective, the move is controversial: whether this tinkering that injects uncertainty will ultimately make markets more volatile. More practically, it has Wall Street on alert for further Treasury interventions at the next quarterly refunding announcement in Novemberwhich lands exactly one day after the midterm elections. On Friday, major bond dealers will receive the Treasury's pre-refunding survey questionnaire. Market observers say the nature of the questions could serve as a "Rorschach test" for interpreting Bessent's inclinations. "You've already told the market that current yield levels are problematic," said Vishal Khanduja, head of broad market fixed income at Morgan Stanley Investment Management. "That's why we think the next two refunding operationsNovember, right after the midtermswill be key moments." Martin Tobias, a strategist in Morgan Stanley's banking division, said the Treasury has several possible paths. The most conventional approach would be to maintain the status quo: keep current auction sizes unchanged for at least the next few quarters and make no changes to forward guidance, just as it did in August. Another option would be to revise issuance forward guidance, ruling out increases in longer-term securities and instead focusing on increases in the two- to seven-year sector. Yet another optionand the least conventionalwould be to explicitly state how large the Treasury's share of short-term bills can be. Although the share of bill issuance has been rising, officials have never clarified the upper limit they are willing to tolerate. For Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, the optimal approach from a taxpayer perspective would be to fund through issuance of around five-year bonds rather than 30-year ultra-long debt. "If your goal is to stop yields from rising, you have to come up with highly innovative tools," he said. A Treasury spokesperson did not immediately respond to a request for comment. Market participants see each option as possible, because long-term benchmark yields in the U.S. and globally are near multi-decade highs. Rising oil prices and the Federal Reserve's resumption of rate hikesreflecting an economic expansion accompanied by stubborn inflationhave combined to push yields higher. At the same time, AI hyperscalers are borrowing heavily to fund their explosive growth, triggering a global competition for capital. All this comes as U.S. annual interest expenses surpassed the $1 trillion mark for the first time, with debt servicing costs now exceeding the defense budget, making the job of financing the government even more difficult. Although Bessent has limited room to significantly lower borrowing costs, he has said he still has a "large toolkit" and hinted he will use every means to curb long-term yields. Wall Street will get another chance to weigh in: the Treasury and a group of dealers and investors known as the Treasury Borrowing Advisory Committee, or TBAC, will hold their quarterly meeting before the early November announcement. Although Bessent is not obligated to adopt the group's recommendationshe even calls himself the "ultimate decision-maker"hearing from market participants before rolling out new policies still has reference value. "TBAC still has a wealth of expertise and experience, and I think it's wise for Bessent to listen to them and take their advice into consideration," said Stephen Douglas, chief economist at NISA Investment Advisors and a former New York Fed staffer. "But this administration and this Treasury secretary have policy goals very different from previous administrations, and they will only pursue what they believe is right." Back in August, the Treasury made a subtle adjustment to its guidance, saying officials were evaluating potential "changes" to future coupon-bearing Treasury and floating-rate note sales rather than simply "increases"leaving room to cut 20-year and 30-year Treasury supply. Citigroup said Friday's dealer survey could hint at reduced long-bond issuance, and Bessent may cite weak pension fund demand for Treasuriespossibly driven by increased long-end corporate bond issuanceas a reason to reduce or eliminate 20-year Treasuries. Reducing longer-term coupon-bearing Treasury auctions means the Treasury will have to further increase short-term bill supply, or possibly introduce another product, such as a one-year floating-rate note linked to the Secured Overnight Financing Rate. In the first quarter of this year, Treasury officials asked dealers whether they should consider issuing such securities. Wells Fargo strategists said last month that now is the "right time" to revisit that idea, noting it would give money market fundsthe largest buyers of short-term billsan alternative way to invest in shorter-dated government debt. Heavy bill issuance has been a key component of the Treasury's debt financing strategy, a approach that has continued from Janet Yellen's tenure. But with the bill share rising above 22%, that reliance is indeed worrying Wall Street. Now that the Fed has resumed rate hikes for the first time in three years, and the market expects at least another 0.84 percentage points of hikes over the next year, the cost of issuing short-term bills seems destined to rise. Still, some market participants do not see increased bill issuance as a bad thing. "There is still room for more bill issuance," said Joe Lavorgna, chief economist for the Americas at SMBC Nikko Securities, who served as an adviser to Bessent during Trump's first year in office. "We can reduce long-bond supply and coordinate with the Fed, because they have discussed a portfolio holding only short-term bills. That way, increased bill issuance would have limited market impact, because it trades close to the federal funds rate, investors will absorb coupon-bearing Treasury issuance, and all parties can accept it." Khanduja of Morgan Stanley Investment Management is not opposed to change. He believes the Treasury should double the size of buybacks and consider reducing long-bond auction sizes at the upcoming refunding. But he cautions against creating more surprises. "Predictability in Treasury policy must be greatly enhanced," he said. "With the Treasury issuing enormous amounts of debt, the worst thing is to combine massive supply with erratic policy and irritate bond buyers."