By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 2 (Reuters) – The US Treasury is widely expected to leave coupon auction sizes unchanged at this week’s quarterly refunding announcement, but investors are focused on possible changes in 2027 that will help finance growing deficits and a wave of government debt maturing in the coming years.
Primary dealers broadly expect that the Treasury will at some point next year cut auction sizes of 20-year and 30-year bonds while boosting issuance of 2-year to 10-year maturities to offset the funding gap created by reduced long-dated borrowing. The move could help limit long-term borrowing costs by reducing the supply of debt at the far end of the curve, where yields have remained elevated.
The Treasury will release its quarterly financing estimates later on Monday, followed by the refunding announcement on Wednesday. The refunding outlines government financing plans for the fourth quarter and the first three months of 2027, including auction sizes for 3-year and 10-year notes as well as 30-year bonds.
“Expectations have been built up that the US Treasury might foreshadow some changes at this refunding announcement, particularly cuts to the long-end auction sizes,” said Guneet Dhingra, head of US rates strategy at BNP Paribas in New York.
“Keep in mind, the Treasury has said they’ll be holding coupon sizes steady for the next several quarters. So anything that actually changes is going to be after the next several quarters, which probably means nothing before August 2027 at the earliest,” Dhingra said.
The case for changes to coupon auction sizes strengthened after the Treasury asked primary dealers in a questionnaire what “future changes to auction sizes” should be considered given expected borrowing needs and investor demand.
Speculation that the Treasury could trim issuance of 20-year and 30-year bonds has grown in recent weeks, reflecting expectations that policymakers may look for ways to slow the climb in long-term yields. The Treasury has already increased buybacks of debt maturing in the 10- to 20-year sector to as much as $6 billion, yet yields have remained stubbornly elevated.
Angelo Manolatos, US rates strategist at Wells Fargo, said more significant factors are pushing long-term Treasury yields higher, limiting the impact any changes in Treasury supply may have on lowering them.
“For bond yields to move lower, we’ll need to see a slowing in growth and growth expectations,” Manolatos said. “We also need to see lower energy prices and those are going to be the real drivers of lower longer-end yields.”
RELIANCE ON BILL ISSUANCE; FISCAL DEFICIT OUTLOOK
The Treasury is also expected to rely on short-term bill issuance heavily in the upcoming quarters to address its borrowing needs. TD Securities is forecasting net bill supply of $678 billion for the November 2026 to January 2027 period.
Gennadiy Goldberg, head of US rates strategy at TD Securities, said the increase in bill supply, rising rate expectations and diminishing money market fund inflows have pushed their yields higher.
“We look for heavy reliance on bills supply to continue,” Goldberg said.
Over the medium term, Wells Fargo expects the T-bill share of the Treasury market to hit 24%, higher than the pre-pandemic level but near the post-World War Two average of 23%. The Treasury Borrowing Advisory Committee (TBAC) has recommended that the T-bill share should be maintained at a level between 15% and 20%.
The expected rise in bill issuance comes against a backdrop of largely stable borrowing needs.
Since the last refunding announcement in August, little has changed, with the deficit coming in at $1.992 trillion in fiscal year 2026. For 2027, J.P. Morgan expects the deficit to remain unchanged at $1.960 trillion, given limited information about further reconciliation packages or government financing.
Jay Barry, J.P. Morgan head of global rates strategy, said the bank’s forecast is not likely to be affected by the US midterm elections on Tuesday, with control of Congress at stake.
“Most roads appear to lead to some form of divided government and a less conducive environment for passing broad fiscal packages, though we see some upside risk to spending if Republicans retain control of both chambers,” Barry said in a research report.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Colin Barr and Will Dunham)
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