The U.S. Treasury Department stated in its quarterly refunding announcement that it would maintain the issuance size of medium- to long-term Treasury securities unchanged for at least the next several quarters. However, for the first time, it included wording indicating 'preliminary consideration has been given to increasing the issuance size of fixed-rate and floating-rate Treasury securities in the future,' a move seen by the market as an early signal paving the way for scaling up issuance. Affected by this unexpected signal, Treasury yields rose, with the 10-year yield climbing at one point.
The U.S. Treasury Department said on Wednesday that it would not consider increasing the issuance of medium- to long-term Treasury securities until early next year, but has begun contemplating raising the issuance scale of longer-term debt in auctions. Analysts believe this move indicates that the U.S. government will rely more on issuing short-term Treasury bills to finance budget deficits, while the market expects that the size of Treasury auctions could increase significantly after early next year, prompting a rapid rise in 10-year Treasury yields.
Given the substantial scale of the U.S. government's fiscal deficit, the market has long anticipated that the Treasury Department, as the financing arm of the U.S. government, would signal an increase in Treasury issuance in the future. In its quarterly refunding statement released Wednesday morning, the Treasury finally addressed this issue.
In the quarterly refunding statement released Wednesday, the U.S. Treasury Department stated that it expects to maintain unchanged auction sizes for fixed-rate medium- to long-term Treasuries and floating-rate Treasuries for 'at least the next several quarters.' This phrasing has been in use since the beginning of last year, reflecting the higher costs associated with issuing longer-term Treasuries compared to short-term Treasury bills, which have maturities of up to one year.
Financing needs for the remainder of this quarter will be met through weekly regular Treasury bill auctions, Cash Management Bills (CMBs), and monthly auctions of fixed-rate medium- to long-term bonds, Treasury Inflation-Protected Securities (TIPS), and two-year Floating Rate Notes (FRNs). The actual auction sizes for the August to October 2025 quarter, and the projected auction sizes for the November 2025 to January 2026 quarter, are as follows:
Next week, the Treasury will auction three-year, 10-year, and 30-year Treasury securities, with a total size of $125 billion, unchanged since May of last year.
Media reports indicate that this approach was widely expected by the market. Most dealers believe that the Treasury will not increase the issuance scale of medium- to long-term Treasuries until mid-2026 or later to help offset federal budget deficits. Partly due to tariff revenues, the U.S. fiscal deficit has slightly declined. The Federal Reserve's interest rate cuts have driven down yields on short-term Treasuries, making the Treasury more inclined to issue short-term debt. Currently, the 10-year Treasury yield is slightly above 4%, while the 12-month Treasury bill yield is approximately 3.5%.
The Treasury stated in a press release:
"Looking ahead, the Treasury has begun preliminary considerations for increasing the auction sizes of fixed-rate and floating-rate Treasury securities in the future, with a focus on assessing long-term demand trends and evaluating the potential costs and risks of different issuance structures."
Some analysts believe this was the biggest surprise in the statement, implying that although the scale of U.S. Treasury auctions will not increase in the coming months, there will be a significant adjustment afterward. The bond market reacted immediately, with the yield on 10-year Treasuries quickly rising to an intraday high.
A senior Treasury official told the media that uncertainty remains regarding when the increased issuance will be implemented. In the meantime, the Treasury is striving to provide market participants with as much clarity as possible. The last time the Treasury announced an increase in the issuance of long-term government bonds was in February of last year, which was implemented in April 2024.
As for next week’s refinancing auction schedule, $58 billion of 3-year Treasury bonds will be auctioned on November 10, $42 billion of 10-year Treasury bonds on November 12, and $25 billion of 30-year Treasury bonds on November 13.
John Canavan, Chief Analyst at Oxford Economics, said that the Treasury’s early mention of the possibility of increased issuance
“Considering the deficit outlook, it is not surprising that the Treasury will need to increase auction sizes in the future.”
“It seems more like prudent advance management rather than indicating that increased issuance will arrive faster than expected.”
Paving the way for the future
Analysts believe that although the market widely expected the Treasury to begin paving the way for increased issuance of long-term government bonds at some point—given the historically high fiscal deficits persisting in the U.S. government, driving up overall debt burdens—the Treasury’s announcement today still caught the market by surprise. It should not have been surprising: As the government bonds issued during the record deficits of 2020 and 2021 during the pandemic gradually mature in the coming years, merely rolling over new debt issuances will only suffice to repay maturing portions, while the U.S. fiscal deficit remains at $2 trillion and continues to rise.
The Federal Reserve has recently re-emerged as a potential source of future demand for US Treasuries. Last week, the Fed announced that it would halt the reduction of its holdings of federal debt assets starting December 1, while planning to reinvest proceeds from maturing mortgage-backed securities into short-term Treasury bills.
The Fed's rate cuts have driven down yields on the shortest-dated US Treasury bonds, giving the Treasury more incentive to issue debt at these maturities. Currently, the 10-year Treasury yield is slightly above 4%, while the yield on 12-month Treasury bills is around 3.5%. This explains why the refinancing statement mentioned that the Treasury “expects to maintain the issuance size of benchmark bills until late November” and will implement “a modest reduction in the size of short-term bill auctions in December.” Subsequently, “by mid-January 2026, the Treasury expects to increase bill auction sizes based on fiscal expenditure conditions.”
If the Treasury does not increase the issuance of medium- to long-term US Treasuries, the share of short-term Treasury bills in the total stock of US debt will rise. Citigroup predicted before Wednesday’s announcement that this proportion would exceed 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 remain at approximately 20% over the long term. As of September, this ratio had already exceeded 21% and is expected to continue rising in the foreseeable future.
Wall Street Expectations Disrupted
Some Wall Street institutions have postponed their forecasts regarding when the issuance of long-term US Treasuries will be increased. This is because Treasury Secretary Bessent previously indicated that he did not want the government to lock in higher borrowing costs prematurely while short-term Treasury bills remain cheaper. However, according to today’s announcement, he clearly plans to do so in early 2026.
This has led to significant confusion in the market: In April this year, JPMorgan’s interest rate strategy team expected the Treasury to increase the auction size of fixed-rate US Treasuries in this refinancing announcement. However, in the bank’s latest forecast (released prior to Wednesday’s announcement), this timeline had been pushed back to November 2026. Now, JPMorgan will need to adjust its forecast again.
In a separate statement, the Treasury Borrowing Advisory Committee noted that current projections may “require an increase in the issuance of fixed-rate US Treasuries during fiscal year 2027 (FY 2027).” Details are as follows:
Regarding issuance, the committee recommended maintaining the issuance sizes of nominal coupon Treasury bonds and Treasury Inflation-Protected Securities (TIPS). The committee discussed possible future adjustments to nominal coupon Treasury issuance and the timing of such adjustments. Given the uncertainty surrounding future financing needs, the committee was divided on how the Treasury should adjust its existing forward guidance. The committee believes that, based on the latest projections, it may be necessary to increase nominal coupon Treasury issuance in fiscal year 2027.
In its letter to Treasury Secretary Bessent, the committee noted that the current issuance structure appears to be close to the 'efficient frontier,' and while the Treasury's increase in the proportion of T-bills in recent years has reduced expected costs to some extent, it has also increased volatility based on the latest results from the Optimal Debt Model. This model is one of many tools used by the Treasury to formulate issuance decisions.
TBAC wrote:
"While the current portfolio seems reasonable under the 'Productivity Boom' scenario, other scenarios indicate additional risks for the Treasury. The model shows that in adverse scenarios, reducing bill issuance, increasing belly issuance, and decreasing bond issuance could significantly lower volatility at a minimal cost."
The committee engaged in 'extensive debate' on the trade-off between 'reducing debt service costs' and 'limiting funding volatility,' including how the Treasury should view risk tolerance and risk mitigation. There were notable differences of opinion among committee members regarding how the Treasury should adjust forward guidance when modifying the size and timing of fixed-rate Treasury issuance in the future.
TIPS and Buybacks
Finally, the refunding statement mentioned the recent increase in U.S. Treasury buybacks, noting that during this refunding quarter, the Treasury plans to conduct four operations in the 10- to 20-year and 20- to 30-year nominal coupon maturity ranges, each with a maximum size of $2 billion. In other nominal coupon maturity ranges, the Treasury plans to conduct one liquidity support buyback with a maximum size of $40 billion. The Treasury also plans to conduct two operations in the 1- to 10-year TIPS range, each with a maximum size of $750 million, and one operation in the 10- to 30-year TIPS range with a maximum size of $500 million.
The Treasury also expects to repurchase up to $38 billion of off-the-run securities across different maturity ranges in the next quarter to support market liquidity and conduct repurchases of up to $25 billion in the 1-month to 2-year range for cash management purposes.
As announced in the previous quarter’s refunding announcement, the Treasury plans to provide more eligible counterparties with direct buyback access in the first half of 2026, with selection criteria based on their participation in Treasury auctions.
Driven by the unexpected news in the refunding statement about 'future increases in coupon issuance,' the yield on the 10-year Treasury note not only surged to an intraday high but also approached the highest level over the past week.
Editor/Joryn
