The US Treasury is set to release its latest quarterly refunding plan this week. Market expectations are widespread that Treasury Secretary Scott Bessent will once again maintain the current guidance on debt issuance, meaning no increase in medium- and long-term bond issuance for at least several more quarters, with continued reliance on short-term Treasury bills (T-Bills) to meet funding needs.

This decision implies the Treasury will still avoid sending signals that could push up long-term US Treasury yields in the near term. However, risks are mounting for this financing strategy as the fiscal deficit continues to widen, the share of short-term debt rises, and markets reprice expectations for tighter Federal Reserve policy in the coming months.

According to Bloomberg, most primary dealers expect the Treasury to refrain from adjusting its forward guidance ahead of the quarterly debt issuance statement on Wednesday. Although Bessent has previously criticized this policy for artificially lowering long-term borrowing costs, the Trump administration now faces political pressure from the approaching midterm elections. Any policy adjustment that could further drive up long-term yields is something the Treasury would rather avoid.

Meanwhile, the 30-year Treasury yield last week reached its highest level since 2007, significantly raising the cost of long-term issuance. While relying on short-term T-Bills reduces current financing costs, it also exposes US debt to greater volatility in short-term interest rates.

Political Considerations Outweigh Debt Management in Forward Guidance Decision

The market's central debate revolves around whether the Treasury will modify the current issuance guidance. This guidance was originally established during the Biden administration, with its core being a commitment to maintain the issuance of medium- and long-term coupon-bearing securities for "at least several more quarters." The market sees this pledge as helping to stabilize long-term yields, but it also limits the Treasury's flexibility to adjust the financing structure in the future.

Strategists at JPMorgan, led by Jay Barry, believe that from a debt management perspective, the Treasury should remove the word "at least" from the statement to create policy space for potentially expanding coupon-bearing issuance. However, the team also notes that with midterm elections approaching, political factors are dominating decisions, and avoiding further yield increases is clearly in the government's interest.

Blake Gwinn, head of US interest rate strategy at RBC Capital Markets, adds that while modifying the forward guidance could increase the Treasury's operational flexibility, the market might interpret it as a signal of future increases in long-term debt issuance, thereby pushing yields higher. He suggests that such an adjustment is inevitable, but the longer it is delayed, the greater the potential market shock when the guidance is eventually removed.

Short-Term Financing Share Keeps Rising, Building Future Funding Pressure

Since Bessent took office, the Treasury has continued to meet funding needs by increasing T-Bill issuance. Against the backdrop of high long-end yields, this strategy has effectively lowered borrowing costs. However, a growing number of institutions believe this simply postpones the risk. Bank of America estimates that if the Treasury maintains current coupon-bearing security issuance through fiscal year 2027, T-Bills' share of outstanding debt could approach 25%, the highest level since 2004 (excluding the global financial crisis and pandemic periods).

JPMorgan forecasts that the Treasury will face new funding gaps starting in fiscal year 2027 (beginning October 1, 2026), estimating cumulative funding needs of approximately $3.7 trillion from 2027 to 2030. At the same time, economists broadly expect the US fiscal deficit to remain around $2 trillion annually for the next several years, indicating continued growth in government funding requirements.

For now, demand for short-term T-Bills is not lacking. Crane Data shows that US money market fund assets have risen to about $8.3 trillion. Bessent has also indicated that stablecoin issuers could become a significant new buyer of T-Bills in the future. Additionally, the Federal Reserve is currently reinvesting proceeds from maturing mortgage-backed securities (MBS) into T-Bills, providing additional demand support for short-term financing.

Minority of Institutions Expect Treasury to Signal Adjustment

While the market consensus is for the Treasury to maintain its current language, some institutions still anticipate a possible tweak in this statement. Deutsche Bank, Wells Fargo, and CIBC Capital Markets all expect the Treasury to adjust its forward guidance language to create room for a potential increase in coupon-bearing issuance as early as next February.

Strategists at Wells Fargo, led by Michael Pugliese, say they would not be surprised if the Treasury once again maintains its current wording, especially given that the next refunding statement in November will be released the day after the midterm elections. However, the team believes that changes in fiscal fundamentals and recommendations from the Treasury Borrowing Advisory Committee (TBAC) ultimately mean the issuance strategy will need to be adjusted.

If Coupon-Bearing Issuance Expands, Market Expects Focus on Short-to-Medium Term

Even if the Treasury decides to expand coupon-bearing issuance, the market broadly expects new supply to be concentrated at the front end of the yield curve, rather than on long-term bonds like the 10-year, 20-year, or 30-year. As of last week, the 5-year Treasury yield was around 4.45%, the 10-year at about 4.73%, and the 30-year at 5.27%, highlighting significantly higher long-term borrowing costs compared to the short-to-medium end.

In its May refunding statement, the Treasury said it was evaluating future coupon-bearing issuance plans, focusing on balancing cost, risk, and structural demand changes across different issuance structures. TD Securities strategists Gennadiy Goldberg and Molly Brooks believe this language already hints that the Treasury prefers to place any future increases in coupon-bearing securities at the front end of the yield curve.

Beyond the issuance strategy, the market will also watch for further details on the Treasury's plan to invest some excess cash in the repo market. The Treasury has already surveyed primary dealers on this issue in its quarterly questionnaire. Assuming no changes to issuance sizes, the Treasury plans to auction $58 billion in 3-year notes on August 11, $42 billion in 10-year notes on August 12, and $25 billion in 30-year bonds on August 13.