According to a report from Zhitong Finance APP, BNP Paribas has warned that U.S. Treasury Secretary Bessent should resist calls to scrap the issuance of 20-year Treasuries, because such a measure, seemingly aimed at lowering long-term financing costs, could prove counterproductive. Not only would it fail to sustainably push down Treasury yields, but it could also drive up borrowing costs and weaken market liquidity.

With long-term Treasury yields hovering near multi-decade highs, bond traders are debating whether the U.S. Treasury will further adjust its debt issuance structure, reducing the supply of long-term government bonds and shifting toward shorter-dated debt. Among the more aggressive options being discussed in the market is cutting or even completely eliminating 20-year Treasury issuance. The 20-year Treasury currently demands a yield even higher than the 30-year variety, an inversion of the conventional relationship in which longer-dated bonds should offer higher yields.

Strategists at BNP Paribas, led by U.S. rates strategy head Guneet Dhingra, believe this approach "won't work." They point out that scrapping the 20-year Treasury is unlikely to sustainably push down overall yields, and could instead produce unintended consequences such as further rising yields and declining market liquidity.

BNP Paribas argues that if the Treasury directly eliminates the 20-year bond, the market may interpret it as an act of "panic" in the face of persistently climbing long-term rates, and conclude that the Treasury's policy tools for stabilizing the bond market are running out, thereby further spurring so-called "bond vigilantes" to step up selling. The bank therefore continues to recommend shorting 30-year Treasuries, expecting their yields to rise further from the current level of about 5.64% to 5.8%.

As discussion over debt issuance policy heats up, the U.S. Treasury is set to release its quarterly refunding statement on November 4, which will disclose the next phase of its Treasury issuance plan. This statement is drawing particular attention because it will be the first quarterly refunding statement since the Treasury unexpectedly adjusted its long-term Treasury buyback program. Bessent previously called the related operation a "Treasury twist operation," which briefly eased selling pressure on long-term Treasuries, but yields subsequently climbed back up and touched a 24-year high.

In its previous quarterly refunding statement, the U.S. Treasury had already quietly adjusted its wording, saying it was assessing potential "changes" in future issuance sizes of coupon-bearing Treasuries and floating rate notes, rather than the previously stated "increases," leaving room for reducing supply of certain maturities in the future.

However, BNP Paribas believes that completely scrapping the 20-year Treasury remains a low-probability tail scenario for now. Since its issuance was resumed in 2020, the 20-year Treasury has consistently faced problems with demand and pricing. Even before the recent sharp rise in yields, there were already voices in the market calling for the elimination of this maturity.

On Tuesday, the 20-year Treasury yield stood at 5.68%, after touching 5.75% a day earlier, the highest level since issuance resumed in 2020. The U.S. Treasury is not without precedent for canceling long-term bond issuance. In 2001, the Treasury suspended issuance of 30-year Treasuries, but at that time the U.S. government was running a fiscal surplus, and its financing needs were significantly lower than current levels. Now, against a backdrop of high fiscal deficits and massive Treasury issuance, if a particular maturity is scrapped, the corresponding financing needs would inevitably have to be borne by other maturities.

BNP Paribas points out that the Treasury's previous expansion of long-term Treasury buybacks still failed to stop yields from rising, which already shows that merely adjusting bond supply has a limited impact on interest rates. If long-term Treasury issuance is reduced, the Treasury may need to increase issuance of short-term T-bills maturing within one year, and against the backdrop of Federal Reserve rate hikes, this form of financing itself could also become more expensive.

BNP Paribas strategists believe that if fundamental issues such as inflation and fiscal deficits are not resolved, it will be difficult to fundamentally push down long-term yields by relying solely on adjusting the issuance structure or expanding bond buybacks. As similar measures repeatedly fail to stop yields from climbing, they may instead further reinforce bond investors' concerns about the U.S. fiscal outlook.