Twenty-five years after the surprise suspension of 30-year Treasury bonds in 2001, Wall Street is watching closely to see whether U.S. Treasury Secretary Bessent will take an axe to the illiquid 20-year Treasury bond in the quarterly refunding statement on November 4.

The U.S. Treasury is under heavy debt issuance cost pressure, with long-term yields having climbed to their highest level since 2002.

Although Treasury Secretary Bessent unexpectedly doubled the size of old debt buybacks in mid-August, this move aimed at lowering long-term borrowing costs failed to stop yields from continuing to rise.

Last week's 10-year and 30-year Treasury auctions saw solid demand, but both auction yields set record highs since 2000.

Against this backdrop, rumors that the Treasury may cut or even cancel 20-year bond issuance have spread rapidly across Wall Street.

Deutsche Bank strategist George Saravelos recently revealed after visiting clients in New York that "murmurs of an imminent suspension of 20-year bond issuance" have emerged within the market.

Jason Williams, head of U.S. rates strategy at Citigroup, went further by advising investors to adjust their positions, as 20-year Treasuries are expected to outperform 10-year Treasuries given expectations of a reduction or cancellation.

If the 20-year bond is ultimately scrapped, the core logic behind it would be identical to the October 2001 suspension of the 30-year bond, namely reducing borrowing costs for taxpayers.

At the time, the Treasury's surprise move shocked the market and drew widespread criticism, and the 30-year bond was subsequently reinstated.

Since former Treasury Secretary Mnuchin reintroduced the 20-year bond in 2020, the instrument has remained marginalized in the market.

Due to poor liquidity, its yield has long exceeded those of the adjacent 10-year and 30-year Treasuries.

As overall Treasury yields soared, the interest expense pressure caused by this anomaly has become increasingly urgent.

However, he also changed his stance in a 2024 Bloomberg interview.

Mnuchin explicitly stated at the time that this maturity should be eliminated, saying bluntly that "it's just too costly for taxpayers."

Intensifying Capital Competition, Structural Shifts Weaken Long-Bond Demand

Current intensifying competition in capital markets further highlights the supply-demand imbalance facing U.S. Treasuries.

Hyperscalers are aggressively issuing long-term corporate bonds to raise funds for AI infrastructure investment, directly competing with Treasuries for asset management companies' capital.

Vishal Khanduja, head of broad market fixed income at Morgan Stanley Investment Management, noted that a fierce battle for capital is indeed playing out in the market.

Additionally, investors are demanding higher yield premiums due to concerns that the Iran conflict could drive up energy costs and trigger inflation, as well as expectations that the Federal Reserve will raise rates to curb prices.

Khanduja also specifically mentioned a structural shift in the U.S. pension system.

He said that defined contribution (DC) pension plans, which once represented a huge source of demand for long-term Treasuries due to their liability management needs, are now shifting toward other models, weakening this support.

Jason Williams' analysis aligns with this view.

He believes that since increased long-end corporate bond issuance has led to weak pension fund demand for Treasuries, Bessent could very well use this as a reason to cut or cancel the 20-year bond.

Citigroup expects the Treasury may reduce both 20-year and 30-year bond issuance by $3 billion per auction and fill the funding gap by increasing short-term T-bill issuance.

The Treasury has not yet made an official response to this potential move.

Beware of "Panic" Signals, Market Eyes Multiple Policy Milestones

Although suspending 20-year bond issuance could ease cost pressure to some extent, it is not a perfect solution.

BNP Paribas strategist Guneet Dhingra warned in a note to clients that the move could be interpreted by the market as a sign of panic.

The strategist emphasized that it might send a dangerous signal that the Treasury's policy tools have been exhausted, thereby emboldening "bond vigilantes" — investors who protest government fiscal policy by selling bonds to push yields higher.

Unintended consequences could also include reduced overall market liquidity.

Suddenly announcing the end of the 20-year bond next month could also damage the Treasury's long-established reputation for "regular and predictable" debt management.

Previously, Bessent's sudden expansion of the buyback program just two weeks after the last refunding statement already raised questions and concerns among market participants.

Market participants are looking for clues about the Treasury's next move from multiple upcoming milestones.

In last August's refunding statement, the Treasury made a subtle adjustment to its forward guidance, changing the wording on future coupon and floating-rate note sales from potential "increases" to "variations," effectively opening the door to reducing 20-year and 30-year bond supply.

If the Treasury is preparing a major policy shift, initial signs could appear this Friday.

At that time, the Treasury will distribute its regular survey to primary dealers ahead of the quarterly refunding statement to gather market feedback; in the past, the survey has inquired about stablecoin demand for T-bills maturing within 12 months.

If this Friday's survey includes questions about 20-year bonds, it could somewhat ease market anxiety.

Then on November 2, the Treasury will update its quarterly projections for cash balances and borrowing needs, and maintaining a smaller operating cash balance is also one of its potential options.

Subsequently on November 4, the highly anticipated latest quarterly refunding statement will be officially released.

Even if no changes are made, investors will carefully scrutinize the statement released the same day by the Treasury Borrowing Advisory Committee (TBAC), composed of outside dealers and investors, whose views carry significant signaling weight.

Regarding the ultimate policy direction, Padhraic Garvey, head of Americas research at ING, believes the baseline forecast is that the Treasury will maintain the status quo.

He stated bluntly: "If you want to take action, keeping other maturities and cutting the 20-year is the most straightforward. Nobody likes the 20-year Treasury."

Garvey added that the wisest approach currently is to maintain a steady issuance pace across the entire yield curve, but he suspects the U.S. Treasury is in an extremely flexible operating state.

"If they feel they can reduce interest costs this way, they are absolutely prepared to shift issuance to different parts of the yield curve."

Any reduction in long-end coupon bond auction sizes would force the Treasury to further increase short-term T-bill supply.

The Treasury could also take this opportunity to introduce new products, such as 1-year floating-rate notes linked to the Secured Overnight Financing Rate (SOFR).

Expanding short-term Treasury issuance in the 2-to-5-year area of the yield curve is also a viable alternative expected on Wall Street.