Wall Street is wary of Bessent making another move to suppress yields; key clues may emerge this Friday

Rising borrowing costs have long been a major concern for the Trump administration. The initial phase of Bessent’s “Treasury Twist” in August did suppress yields, but it also broke the Treasury’s decades-long principle of regular and predictable bond issuance, raising market anxiety over increased policy uncertainty.

For investors, the Treasury’s next move will directly impact the supply-demand dynamics and pricing logic of the U.S. Treasury market.

Multiple Treasury Strategies Remain Undecided

According to Morgan Stanley banking strategist Martin Tobias, the U.S. Treasury currently faces several options.

The most conservative plan is to maintain the status quo, continuing the approach from August and keeping auction sizes unchanged for at least the next few quarters, without altering forward guidance.

Another option is to revise issuance guidance by explicitly ruling out increases for long-term bonds such as 20-year and 30-year maturities, and instead focusing additional issuance on short-to-medium tenors of 2- to 7-years.

The most unconventional plan is to set a clear cap on the share of short-term Treasury bills in total debt issuance. Officials have never previously set such a ratio, but the share of short-term bills has now risen above 22%.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, believes that, from the taxpayer’s perspective, the optimal plan is to shift government financing toward around the 5-year tenor, rather than extending to 30 years. He said:

If your goal is to curb rising yields, you must be creative enough.

Reduction in Long-End Supply Sparks Bill Substitution Discussion

If the auction sizes for long-end coupon bonds are reduced, the U.S. Treasury will have to further expand its supply of short-term bills or possibly introduce new products.

In the first quarter of this year, the Treasury already sought dealer feedback on issuing one-year floating rate notes linked to the Secured Overnight Financing Rate (SOFR).

Wells Fargo strategists stated last month that now is a “suitable time” to revisit this plan, pointing out that such products could provide another government debt investment channel for money market funds, the primary buyers of short-term bills.

Relying on short-term bills for government financing is a strategy inherited from former Treasury Secretary Yellen’s tenure. However, with the Federal Reserve resuming rate hikes—and expectations for at least 84 more basis points of tightening over the next year—rising bill financing costs are a growing concern.

Joe Lavorgna, Chief Economist at SMBC Nikko Securities North America and former adviser to Secretary Bessent, maintains a relatively open attitude toward expanding short-term bill issuance.

He believes it is feasible to cut part of the long-end supply while coordinating with the Federal Reserve, which had previously discussed holding a pure bill investment portfolio, thus minimizing market impact.

Market Demands for Treasury’s Predictability Return

Currently, annual U.S. interest expenditures have surpassed $1 trillion for the first time, and debt servicing costs have overtaken the defense budget, leaving the government under unprecedented financing pressure.

Benchmark long-end yields are now at multi-decade highs, driven by rising oil prices, the Fed’s resumption of rate hikes, and intensified global capital competition fueled by massive borrowings from AI-focused big tech companies.

Vishal Khanduja supports action from the Treasury, advocating that the size of buybacks should be doubled and long-end auction sizes reduced in this refinancing round. However, he also warns that surprise moves come at a high cost.

He said:

The Treasury must become more predictable. Given the enormous size of debt it needs to issue, the last thing it should do is become unpredictable at the other end and anger its buyers.