Scott Bessent's surprise August "Treasury twist" upsized purchases of older securities to push back on climbing yields. It showed results at the start, but it also broke with the long-running strategy of staying "regular and predictable" to minimize borrowing costs over time. That shift reignited a long-running debate: even if the goal is to cool long rates, does added uncertainty just make markets jumpier?
Rates are already elevated. Major Treasury benchmarks sit roughly 2 percentage points above their six-year average and well above the post-2020 average, with upward pressure stemming from more expensive oil and a Federal Reserve that has restarted rate hikes. Market pricing points to at least 0.84 percentage point more in rate hikes over the next year. A worldwide scramble for capital is underway as AI hyperscalers take on sizable debt to finance rapid expansion.
Bessent has said he has a "big tool kit" and has indicated he will deploy any tools he can to bring down long-term yields. A Treasury spokesperson did not promptly respond to a request for comment.
Traders are bracing for more activism at the next quarterly debt-refunding announcement in November, which lands the day after the midterm elections. Ahead of that, on Friday the Treasury will send a survey questionnaire to the biggest bond dealers. The tone and topics could be a Rorschach test of Bessent's leanings. At Morgan Stanley Investment Management, Vishal Khanduja, who leads broad markets fixed income, said, "You've announced to the market that these yield levels are problematic," and added, "That's why we believe that the next two refundings, with November right after the midterms, are going be pivotal."
The Treasury will also convene with the Treasury Borrowing Advisory Committee, a group of dealers and investors known as TBAC, in early November ahead of the announcement. Bessent is not required to follow TBAC's recommendations, having described himself as "the house," but the group's input still matters.
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Morgan Stanley strategist Martin Tobias outlined several paths. The standard play would be to maintain current auction sizes for at least the next few quarters and leave forward guidance unchanged, as in August. Another route would be to revise guidance to exclude increases to longer-dated securities while focusing more on two- to seven-year maturities. The most unorthodox option would be to spell out how big a portion bills are allowed to be, a line Treasury has never drawn even as that segment has expanded.
In August, Treasury subtly revised its guidance to indicate it was assessing future "changes" to coupon and floating-rate note sales instead of only "increases." That opens the door to potential cuts in 20- and 30-year supply. According to Citigroup Inc., Friday's dealer survey may hint at reduced long-end issuance, and Bessent may point to poor pension-fund demand for Treasurys - possibly a result of more robust long-duration corporate bond supply - as a rationale to cut back or even scrap the 20-year bond.
If longer-dated coupon auctions are trimmed, Treasury would need to further increase bill supply or introduce another product, such as a 1-year note with a floating rate linked to the Secured Overnight Financing Rate. Officials asked dealers about that concept in the first quarter. Wells Fargo & Co. strategists called it an "opportune time" last month to revisit the idea since it would give money-market funds, the biggest buyers of T-bills, another short-dated government option.
Selling more bills has been a core part of the funding strategy carried over from Janet Yellen's tenure, lifting bills to more than 22% of issuance. The reliance on bills worries some on Wall Street as the Fed has resumed raising rates after a three-year gap.
Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, says financing more in the five-year sector would be better for taxpayers than issuing as long as 30 years. "If your objective is to stop the movement of yields higher, then you are going to have to get really creative," he said. Khanduja doesn't object to adjustments and believes Treasury ought to double buyback size and consider trimming long-bond auction sizes at the upcoming refunding; however, he warns against surprises. "Treasury has to be a lot more predictable," he said. "The last thing you want to do is irritate your buyers given not only this sheer amount of debt that Treasury has to issue, and then be unpredictable on the other end."
For the first time on record, America's annual interest expense has topped $1 trillion, and debt service now exceeds the defense budget. With the Fed still tightening and AI giants adding to the global scramble for funding, tweaks to how Washington issues debt can ripple into savings yields, mortgage rates, and bond fund returns. Watch for Friday's dealer survey, the TBAC meeting in early November, and the refunding right after the midterms. If the mix shifts toward more 2-to-7-year notes, fewer 20s and 30s, a bigger bill share, or even a new SOFR-linked 1-year floater, it could influence where rates settle next.
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