Will the US cancel 20-year Treasury bonds? BNP Paribas: It may trigger market panic; Citibank: Positioning 20-year bonds to outperform 10-year bonds

The U.S. Treasury is facing a critical decision: whether to reduce or even cancel the issuance of 20-year Treasury bonds that were restarted in 2020.

Several Wall Street institutions have recently received signals from clients suggesting that the U.S. Treasury may provide clear indications regarding the 20-year Treasury bond issuance in the quarterly refinancing statement on November 4.

Deutsche Bank strategist George Saravelos, after visiting clients in New York, said that there is already talk in the market about "the imminent suspension of 20-year Treasury issuance"; Citi, meanwhile, advises investors to position themselves early to capture the potential of the 20-year Treasury outperforming the 10-year Treasury.

Citi expects the auction sizes of both 20-year and 30-year Treasuries to be reduced by $3 billion each, with the resulting gap to be filled by increased issuance of short-term Treasury bills. If the 20-year bond is ultimately cancelled, funds will be reallocated toward the short end of the yield curve, and the pricing logic for long-end assets will also shift accordingly.

Under the pressure of long-term borrowing costs reaching their highest levels in more than two decades, Treasury Secretary Janet Yellen’s earlier move to expand Treasury buybacks failed to effectively suppress long-end yields, increasing speculation about her next steps. The market is currently focused on two key dates:

• First is this Friday, when the U.S. Treasury will send its routine survey to primary dealers. If it includes questions related to 20-year Treasuries, this will be seen as an early signal of a possible policy change;
• Second is November 4, the release date for the quarterly refinancing statement and synchronous market feedback from the Treasury Borrowing Advisory Committee (TBAC).

Since its restart in 2020, the 20-year Treasury has always stood out as an outlier in the U.S. government debt market.

The yield on the 20-year has remained consistently higher than both the 10-year and 30-year Treasuries, resulting in a so-called "hump" structure. This means the Treasury has to pay more to finance at this maturity.

Based on this logic, even former Treasury Secretary Steven Mnuchin—who was instrumental in restarting the 20-year Treasury—publicly stated in 2024 that this security should be phased out, noting:

This is too costly for taxpayers.

As U.S. Treasury yields overall remain at multi-decade highs, driving up interest expenses, this structural cost disadvantage is becoming ever more apparent.

There is precedent for this. In 2001, the U.S. Treasury announced it would stop issuing the 30-year Treasury in order to cut borrowing costs, although this decision was heavily criticized at the time and the 30-year bond was eventually restarted a few years later.

The weakness in long-end Treasury demand has deeper, structural reasons.

Morgan Stanley’s Co-Head of Broad Markets Fixed Income Vishal Khanduja noted that technology mega-caps, to support AI infrastructure investment, have recently issued a large volume of long-dated corporate bonds—competing directly with Treasuries for allocation from pensions and other asset managers.

Meanwhile, the structural shift from defined benefit to defined contribution pension plans has also eroded a traditional cornerstone of long-end Treasury demand. The former, driven by liability management, have historically been major buyers of ultra-long government debt.

Jason Williams, Citi’s U.S. Rates Strategy Head, noted that Yellen may attribute the recent weakness in pension demand for Treasuries to increased corporate bond supply at the long end, using this as justification for reducing or even cancelling 20-year Treasury issuance.

Yellen has previously implemented a series of unconventional measures to try to bring down long-term rates, including a surprise move to greatly expand Treasury buybacks just two weeks after releasing the August quarterly refinancing statement.

This move sparked concerns among market participants about whether the Treasury’s “regular and predictable” debt management practices were being compromised. However, the impact of expanded buybacks was limited, with 30-year Treasury yields recently reaching their highest levels since 2002.

Although demand at last week’s 10-year and 30-year Treasury auctions was decent, both auctions saw the highest tail (yield premium) since 2000, indicating that the appetite for higher yield compensation has not subsided.

If Yellen decides to further reduce the long end, the Treasury will have several alternative options: increase short-term bill issuance, add to the supply of 2- to 5-year notes, introduce one-year floating rate notes linked to the Secured Overnight Financing Rate (SOFR), or cut the quarterly cash balance target.

The Treasury plans to update its quarterly borrowing needs and cash balance forecasts on November 2.

Not everyone believes cancelling the 20-year Treasury is a silver bullet.

BNP Paribas warned last week that this move "could be seen by the market as a panic signal, indicating the Treasury has run out of policy tools and motivating bond vigilantes to step in and exert pressure." The team led by strategist Guneet Dhingra also cautioned clients that "unexpected consequences" could include deteriorating market liquidity.

ING’s Head of Americas Research, Padhraic Garvey, gave a more straightforward assessment:

If you want to do something while leaving everything else unchanged, just cut the 20-year. Nobody likes the 20-year Treasury.

But he also stated:

Our baseline assumption is that things will stay as they are.

Garvey added:

Currently, maintaining a stable issuance pace across the yield curve appears to be the sensible move. But I suspect the U.S. Treasury is keeping its options very open right now, and if they believe costs can be lowered, they are fully prepared to shift issuance to different parts of the curve.