The U.S. Treasury maintained long-term bond issuance unchanged but hinted at possible future increases; the 10-year U.S. Treasury yield jumped.

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The U.S. Treasury Department said on Wednesday that it will not consider increasing the issuance of medium- and long-term U.S. Treasuries until after the beginning of next year, but has already started considering increasing the scale of long-term debt issuance at auctions. Analysts believe this means the U.S. government will rely more on issuing short-term Treasury bills to finance the budget deficit. The market expects a significant increase in Treasury issuance after the beginning of next year, and 10-year Treasury yields are rising rapidly.

Given the large scale of the U.S. government's fiscal deficit, the market has long expected that the Treasury Department, as the government's financing arm, would signal a future increase in Treasury issuance. In Wednesday morning's quarterly refunding announcement, the Treasury Department finally addressed this issue.

In the quarterly refunding announcement released Wednesday, the U.S. Treasury stated that it expects to maintain the auction size of fixed-rate medium- and long-term Treasuries and floating-rate Treasuries unchanged for "at least the next few quarters." This phrasing has been in use since early last year, reflecting higher costs of longer-term bonds compared to short-term Treasury bills with maturities up to one year.

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

Next week, the Treasury will auction 3-year, 10-year, and 30-year bonds, totaling $125 billion, maintaining the same size since May last year.

The media reports that this approach is widely anticipated in the market. Most dealers believe the Treasury will wait until mid-2026 or later to increase the issuance of medium- and long-term Treasuries to help fill the federal fiscal deficit. Partly due to tariff revenues, the U.S. fiscal deficit has slightly declined. The Fed's rate cuts have driven short-term Treasury yields lower, making the Treasury more inclined to issue short-term bonds. Currently, the 10-year Treasury yield is slightly above 4%, while the 12-month Treasury bill yield is about 3.5%.

The Treasury stated in its press release:

"Looking ahead, the Treasury has started to preliminarily consider future increases in the auction size of fixed-rate and floating-rate notes, focusing on assessing long-term demand trends and assessing potential costs and risks of different issuance structures."

Some analysts believe this is the biggest surprise in this statement, meaning that although the size of Treasury auctions will not increase in the coming months, there will be a significant increase thereafter. The bond market responded immediately, with the 10-year yield rising rapidly to session highs.

A senior Treasury official told the media that there is still uncertainty as to when the increase will be implemented. In the meantime, the Treasury is working to provide market participants with as much clarity as possible. The Treasury last announced an increase in long-term debt issuance in February last year, which was implemented in April 2024.

As for next week’s refunding auction schedule: On November 10, $58 billion in 3-year notes will be auctioned; on November 12, $42 billion in 10-year notes; and on November 13, $25 billion in 30-year notes.

John Canavan, chief analyst at Oxford Economics, said the Treasury’s early mention of a potential increase,

"Given the deficit outlook, it is not surprising that the Treasury will need to increase auction sizes in the future."

"It's more about prudent advance management, rather than an earlier-than-expected increase."

Laying Groundwork for the Future

Analysts believe that although the market generally expected the Treasury to begin preparing to increase long-term bond issuance at some point — after all, the U.S. government continues to run historically high deficits, which adds to the overall debt burden — the Treasury's announcement today still surprised the market. In fact, this should not be a surprise: With the bonds issued during the record deficits of 2020 and 2021 maturing over the next few years, simply rolling those over will only cover maturities, while the U.S. fiscal deficit remains at $2 trillion and continues to rise.

The Fed has recently become a potential future source of demand for Treasuries again. Last week, the Fed said it will stop reducing its holdings of federal debt assets starting December 1, but plans to reinvest maturing mortgage-backed securities proceeds into short-term Treasury bills.

The Fed’s rate cuts have lowered U.S. short-term bond yields, giving the Treasury more motivation to issue these maturities. Currently, the 10-year Treasury yield is slightly above 4%, while the 12-month Treasury bill yield is about 3.5%. That's why the refunding statement mentioned that the Treasury "expects to maintain the benchmark bill issuance size until late November," and will "slightly reduce the size of short-term bill auctions in December." Subsequently, "by mid-January 2026, the Treasury expects to increase bill auction sizes according to fiscal expenditures."

If the Treasury does not increase the issuance of medium- and long-term bonds, the proportion of short-term bills in outstanding Treasury debt will rise. Citigroup, before Wednesday's announcement, expected this ratio to surpass 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 ratio should long-term stay around 20%. As of September, it had already surpassed 21% and will continue rising in the foreseeable future.

Wall Street Expectations Disrupted

Some Wall Street institutions have postponed their forecasts for when the Treasury will raise long-term debt issuance, as Treasury Secretary Bessent previously hinted he did not want to lock in higher borrowing costs for the government prematurely when short-term bills are still cheaper. However, according to today’s announcement, he clearly plans to do this in early 2026.

This led to considerable market confusion: In April this year, JPMorgan’s rate strategy team expected the Treasury to increase fixed-rate Treasury issuance in this refunding announcement. But in their latest forecast (released before this Wednesday’s announcement), this date was pushed to November 2026. Now, JPMorgan has to adjust its forecast again.

According to a separate statement, the Treasury Borrowing Advisory Committee said the current forecast may mean "an increase in fixed-rate Treasuries in fiscal year 2027 may be needed," with details below:

For issuance, the committee recommends keeping the size of fixed-rate nominal coupon Treasuries and TIPS unchanged. The committee discussed potential future adjustments in fixed-rate Treasury issuance and the timing. Due to the uncertainty of future financing needs, the committee was not unanimous on how the Treasury should adjust its forward guidance. According to the latest forecast, an increase in fixed-rate Treasury issuance may be needed in fiscal year 2027.

In its letter to Secretary Bessent, the committee noted that the current issuance structure seems close to the "efficient frontier," and in recent years, increasing the proportion of T-bills has somewhat reduced expected costs, but the latest Optimal Debt Model shows it has increased volatility. This model is one of many tools the Treasury uses in issuance decisions.

TBAC wrote:

"Although in the 'Productivity Boom' scenario, the current combination seems reasonable, in other scenarios the Treasury faces additional risk. The model shows that, in adverse cases, reducing bill issuance, increasing belly issuance, and decreasing bond issuance could, for minimal cost, significantly reduce volatility."

The committee engaged in "extensive debate" around the trade-off between "reducing debt service cost" and "limiting volatility," including discussion on the Treasury’s risk tolerance and risk mitigation. For future adjustments to fixed-rate Treasury issuance and timing, the committee’s opinions on how forward guidance should be adjusted varied greatly.

TIPS and Buyback Operations

Finally, the refunding statement mentioned a recent increase in Treasury buybacks, noting that in the 10-20 year and 20-30 year fixed-rate nominal coupon maturity ranges, the Treasury plans four operations in this refunding quarter, each up to $2 billion. For other fixed-rate nominal coupon maturities, the Treasury plans one liquidity support buyback of up to $4 billion. The Treasury also plans two operations in the 1-10 year TIPS maturity range, each up to $750 million, and one operation in the 10-30 year TIPS range, up to $500 million.

The Treasury also expects, in the next quarter, to buy back up to $38 billion of off-the-run securities across different maturities to support market liquidity, and up to $25 billion in the 1-month to 2-year range for cash management purposes.

As announced in the previous refunding statement, the Treasury plans to offer more eligible counterparties direct access to buyback operations in the first half of 2026. Selection is based on their performance in Treasury auctions.

Due to the unexpected mention in the refunding statement of a "future increase in fixed-rate coupon issuance," the yield on 10-year Treasuries not only hit a new intraday high, but also approached the highest level of the past week.

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