The Zhitong Finance APP reports that the debt management team led by US Treasury Secretary Bentsen is expected to maintain the plan for the US Treasury to sell longer-term securities, especially after recent fluctuations in the $29 trillion US debt market. Despite previously criticizing former Treasury Secretary Yellen for favoring the issuance of US short-term Treasury bonds, Bentsen has indicated since taking office in January this year that the Treasury has a "long way to go" in replacing short-term bonds with long-term ones. Therefore, Wall Street expects that the auction size for the quarter ending in May to July announced on Wednesday will not change.

Earlier this month, the yield on US long-term Treasury bonds experienced the largest increase in decades, which only increases Bentsen's stakes as he remains committed to lowering long-term bond yields. Traditionally, quarterly supply announcements are used to convey guidance on how auction sizes may evolve.

Subadra Rajappa, head of US interest rate strategy at Industrial Bank, stated in a telephone interview: "Given the volatility in the US Treasury market, Secretary Bentsen will communicate any changes very cautiously, especially concerning changes in bond sizes."

The latest statement on February 5—Bentsen's first during his tenure—retains the guidance from the Yellen era, expecting to maintain stable auction sizes for bills and bonds "at least for the next few quarters." According to historical patterns, Wednesday's announcement will determine the size of next week's so-called quarterly refinancing auctions, including 3-year, 10-year, and 30-year Treasury bonds. It will also predict the sizes of all other bill and bond auctions before the end of July.

If no changes are made, the total auction amount next week will reach $125 billion, including: $58 billion of 3-year US Treasury bonds on May 5; $42 billion of 10-year US Treasury bonds on May 6; and $25 billion of 30-year US Treasury bonds on May 8.

Debt ceiling issue

A further limitation on the USA Treasury's ability to change its path is the federal debt ceiling. Before Congress raises or suspends the debt ceiling, maintaining the debt ceiling requires the government to reduce the issuance of notes maturing in up to one year and decrease cash balances. If possible, the supply of notes will be increased to supplement cash reserves.

The Treasury may choose to provide guidance on the debt ceiling considerations in Wednesday's statement, including estimating when its funds will run out without increasing or suspending the debt ceiling. Wall Street's projections have declined between August and October; however, this forecast may change based on the government financing needs and cash balance trajectory released at 3 PM EST on Monday.

The supply of U.S. Treasury bills has become a flashpoint during the 2024 presidential election, as Republicans, including Besant, accuse Yellen of curbing the sale of longer-term bonds to suppress key market interest rates and support the economy ahead of the November elections. The proportion of short-term notes within the outstanding debt has increased, exceeding the range of 15% to 20% previously suggested by the Treasury Borrowing Advisory Committee (TBAC), comprised of investors, dealers, and other market participants. However, both TBAC and Yellen's team have countered these criticisms.

Although the auction sizes for some U.S. Treasury securities (especially the 7-year and 20-year) are far below the peak levels reached in 2021, the auction sizes for other Treasury securities remain at record levels, including the benchmark 10-year U.S. Treasury. The increase in auction sizes could lead to rising yields, and Besant has stated since taking office that the government hopes yields will decline.

The forecast of sustained massive fiscal deficits in the USA over the next few years explains why many traders expect the size of U.S. Treasury auctions to eventually increase. Meanwhile, some Treasury observers suggest that the rapid growth of stablecoins (a type of crypto pegged to the dollar) could support higher levels of bill issuance.

For Wednesday's announcement, the Treasury conducted a quarterly survey of dealers to inquire about the demand for U.S. Treasury securities as reserve assets for stablecoins. JPMorgan estimates that there were $114 billion in Treasury securities supporting stablecoins at the end of last year, comprising less than 2% of the nearly $6 trillion in outstanding bonds.

However, in a report led by Gennadiy Goldberg, strategists at TD Securities stated that the "rapid growth of the stablecoin industry" means it may become an "important participant" in the Money Market. They wrote that if Wednesday's guidance does not change, "we believe the market will interpret it as the Treasury's willingness to rely more on short-term Treasury bonds," which will have a positive impact on longer-term securities.

Demand for short-term US Treasury bonds.

Led by Jay Barry, strategists at JPMorgan stated that if the Treasury asks the TBAC to analyze the issue of stablecoins increasing demand for US Treasury bonds, "we would not be surprised." Bessent mentioned last week at a closed-door meeting at JPMorgan that stablecoins could be a major source of demand for US Treasury bonds.

Barry's team wrote in a report last week: "This will be one of the reasons for maintaining the share of short-term US Treasuries above average, and we do believe there is significant growth potential in this area. This policy analysis path could be a credible reason to delay increasing auction sizes until 2026."

In contrast, measures to reduce the average maturity of outstanding bonds or conduct buybacks of old bonds - which Bessent said on April 14 was a potential remedy for stabilizing the market - "may be seen as gimmicks," the JPMorgan team wrote - could lead to higher yields rather than lower yields. JPMorgan's base forecast is that the Treasury will begin to gradually expand the scale of Treasury auctions starting in November, but based on the initial assessment since Secretary Bessent took office, this move may be delayed until 2026.