The U.S. Treasury Department indicated on Wednesday that it is closely monitoring a rising trend in demand for the shortest-maturity government debt, specifically Treasury bills maturing within one year, with this demand originating from both the Federal Reserve and private investors. However, in its latest quarterly refunding statement, the Treasury did not signal any intention to reduce the issuance size of medium- and long-term notes and bonds, maintaining an overall stable debt management policy. Within this document, known as the "Quarterly Refunding Statement," the U.S. Treasury anticipates keeping the auction sizes for nominal coupons, long-term bonds, and floating-rate notes unchanged for at least the next several quarters. This forward guidance of "no adjustments for at least the coming quarters" has now been consistently employed for two years. The Treasury also stated it will continue to assess whether future increases in the issuance of fixed-rate coupons and floating-rate notes are necessary, focusing particularly on shifts in structural demand and the costs and risks associated with different issuance structures.

It is noteworthy that this statement regarding a potential long-term increase in issuance comes as the Treasury continues to "monitor" the Federal Reserve's expanding purchases of Treasury bills. In December of last year, the Fed announced it would purchase $40 billion per month in Treasury bills maturing in one year or less, a program scheduled to last until April, aimed at ensuring ample reserves in the banking system. Concurrently, the Treasury has observed growing demand for Treasury bills from the private sector. John Canavan, Lead Analyst at Oxford Economics, characterized the overall message from the Treasury's announcement as "steady as she goes, maintaining the status quo."

The market's reaction to the statement reflected mild disappointment. Some traders had previously speculated that the Treasury might adopt a more proactive debt management strategy to lower long-term borrowing costs, but the announcement did not deliver a significant shift. Following the release, the yield on the benchmark 10-year U.S. Treasury note climbed to its daily high, reaching approximately 4.29% around 9:17 AM New York time. Steven Zeng, an Interest Rate Strategist at Deutsche Bank, noted that market expectations were elevated ahead of the refunding announcement, with some investors anticipating more assertive debt management measures; the failure to meet these hopes led to rising long-end yields and a narrowing of swap spreads, reflecting the disappointment.

In recent years, against a backdrop of persistent growth in federal expenditures, the U.S. Treasury has increasingly relied on short-term bill financing. An immediate reduction in the issuance of long-term bonds or 10-year notes would conflict with the Treasury's long-standing principle of "regular and predictable" issuance. Treasury Secretary Scott Bessent had previously emphasized this commitment to debt management in a speech last November. The Treasury also announced that next week's refunding auctions will total $125 billion, comprising $58 billion in 3-year notes to be issued on February 10th, $42 billion in 10-year notes on February 11th, and $25 billion in 30-year bonds on February 12th. This round of refunding is expected to raise approximately $34.8 billion in new cash for the Treasury.

Regarding Treasury Inflation-Protected Securities (TIPS), the Treasury stated it would maintain the current auction sizes. For some time prior, the Treasury had gradually increased TIPS issuance to maintain their share of the overall government debt market. Before the statement, primary dealers were divided on TIPS policy, with some expecting unchanged sizes and others predicting an increase in at least one auction over the next three quarters. For near-term arrangements concerning Treasury bills, the Treasury expects to maintain the benchmark bill issuance size at current levels, at least until mid-March. Subsequently, it plans to gradually reduce supply in preparation for an increase in Treasury cash inflows around the April 15th tax filing deadline. The Treasury anticipates these adjustments could lead to a net reduction in total bill supply of $250 billion to $300 billion by early May.

Strategists at Morgan Stanley noted that the Federal Reserve's current large-scale Treasury bill purchases have, to some extent, mitigated the risk of market "supply indigestion." However, the Fed's plans beyond April remain unclear, adding a layer of uncertainty, particularly with the nomination of Kevin Warsh, slated to assume the Fed Chairmanship in May. Warsh has historically advocated for reducing the size of the Fed's balance sheet. Given the massive annual U.S. fiscal deficit, approaching $2 trillion, and the pressure from a concentration of medium-term note maturities in the coming years, most Wall Street institutions believe the Treasury will ultimately have to increase the issuance of interest-bearing debt. When that occurs, the general market expectation is that the Treasury would more likely favor increasing issuance at the short or medium end of the yield curve, rather than significantly boosting the supply of 30-year ultra-long-term bonds.

Globally, a trend of weakening demand for long-term bonds like the 30-year maturity has prompted governments in Europe and Japan to reduce issuance of such securities, sparking discussion about whether the U.S. might adopt a similar strategy. The Treasury Borrowing Advisory Committee (TBAC) also mentioned in its Wednesday statement that some foreign debt management offices have indeed exhibited a shift "toward a tilt in shorter-dated issuance." TBAC members also deliberated on the pacing options for future auction size increases: whether to implement hikes earlier and more gradually, or to adopt a faster upward path once the financing gap widens. The committee suggested that increasing the size of interest-bearing debt issuance starting in the new fiscal year this October could be reasonable.

Canavan added that Bessent has clearly prioritized lowering long-term yields, suggesting that as long as he remains Treasury Secretary, any future issuance increases occurring later this year or next would likely be more concentrated in shorter-maturity bonds of 5 years and below.