U.S. Treasury Department's Survey Fails to Signal Debt Reduction, Bond Yields Rise with 10-Year Yield Back Above 5.12%

Author: Wall Street Watch

The latest primary dealer survey from the U.S. Treasury Department did not provide a clear signal of an impending reduction in the scale of long-term Treasury auctions, disappointing investors betting on government action to lower long-term interest rates. Consequently, U.S. Treasury prices fell, and yields rose overall.

This survey is part of the Treasury's preparations for the quarterly refinancing plan to be announced on November 4. The market had hoped to find clues in the questionnaire regarding potential adjustments to long-term Treasury issuance by Treasury Secretary Janet Yellen, particularly the possibility of reducing or even halting the issuance of 20-year bonds, which has been a hot topic recently. However, the Treasury only broadly inquired about what auction size adjustments should be considered in the future, without explicitly indicating that a reduction in long-term bond supply is imminent.

On Friday, October 16, during the midday trading session, after the details of the Treasury's survey were released, U.S. Treasury yields rose across the board. The yield on the benchmark 10-year Treasury note climbed back above 5.12%, approaching the intraday high of 5.1315% reached before the stock market opened, with the intraday increase expanding to 6.5 basis points; the yield on the 20-year Treasury rose by 5.4 basis points, and the yield on the 30-year Treasury increased by about 5 basis points, while the yield on the 2-year Treasury erased its earlier decline and turned positive.

Meanwhile, oil prices had already accelerated their rise shortly before the survey was released, adding upward pressure to Treasury yields. Therefore, the rise in yields on Friday reflected both the market's disappointment at the Treasury's failure to signal a reduction in supply and the influence of changes in energy prices.

What Did the Treasury Ask, and What Is the Market Waiting For?

In this survey, the Treasury sought opinions from primary dealers, focusing on what adjustments should be considered for Treasury auction sizes in light of structural changes in investor demand and the potential evolution of mid-term demand expectations in the future.

Such surveys are a routine preparatory work for the Treasury's quarterly refinancing decisions, aimed at understanding the judgments of major dealers regarding government financing needs, investor demand, and market conditions, providing a reference for determining the scale and structure of Treasury issuance. The survey itself is not a debt issuance plan and does not imply that the Treasury has decided to adjust the issuance scale for any maturity.

According to reports, this questionnaire also covered several debt management issues:

• Long-term Treasury Buyback Plans: The Treasury inquired whether expanding the scale of long-term Treasury buybacks has improved market liquidity and trading operations; how larger buybacks affect dealers' ability to handle customer buy and sell orders, and the willingness of customers to participate directly or indirectly in buybacks.

• How to Further Improve Buyback Efficiency: The Treasury solicited dealers' opinions on what adjustments could be made to the buyback plan.

• Timing of Treasury Bill and Floating Rate Bond Issuance: The Treasury asked whether the current practice of avoiding issuing Treasury bills and floating rate bonds on Federal Open Market Committee (FOMC) meeting days should be adjusted.

• Economic and Financing Outlook: Dealers were also required to provide forecasts regarding the economy, fiscal policy, monetary policy, and the Treasury's financing needs for the next few fiscal years.

What truly disappointed the market was that the Treasury did not directly address the issue of reducing long-term Treasury supply. Some investors had originally hoped that the Treasury would use this questionnaire to more clearly signal that it was considering reducing the auction size of long-term bonds, or even stopping the issuance of 20-year bonds, in response to the Trump administration's desire to lower financing costs.

Blake Gwinn, head of U.S. interest rate strategy at RBC Capital Markets, stated that if the Treasury wanted to signal or influence yields through the questionnaire, it could have posed more direct questions. He believes that this survey did not convey any substantive signals; considering that some investors were expecting significant adjustments, such as stopping the issuance of 20-year bonds, this outcome may disappoint the market.

20-Year Bonds Become the Focus, Wall Street Bets on Treasury Adjusting Debt Structure

The market is particularly sensitive to the survey, which is related to the recent high levels of long-term U.S. Treasury yields. As the U.S. fiscal deficit continues and interest payments on existing debt increase, the government's financing needs are rising, making the pressure of long-term Treasury supply a core issue of concern for investors.

Bloomberg reported that some Wall Street institutions had previously bet that the Treasury might alleviate the pressure of long-term bond supply by adjusting its debt structure. Market discussions have particularly focused on the 20-year Treasury: whether the Treasury will reduce its issuance scale or even completely cancel the issuance of this maturity.

From a financing mechanism perspective, the Treasury needs to meet the overall borrowing needs of the government, but this does not mean that it must issue bonds of each maturity in fixed proportions. If the demand for short-term financing tools and the market's capacity to absorb them allow, the Treasury can theoretically increase short-term debt issuance to reduce pressure on the long-term bond market. However, adjusting the maturity structure will also change the government's future refinancing arrangements and cannot be simply understood as a reduction in total borrowing needs.

Molly Brooks, U.S. interest rate strategist at TD Securities, stated that the Treasury's question setting remains too broad and does not explicitly ask whether to reduce long-term bond supply, leading to market disappointment. She expects that the scale of long-term Treasury auctions may not be adjusted until at least February 2027.

This judgment implies that the optimistic scenario some investors had previously bet on—namely, that the Treasury would announce a reduction in long-term issuance scale in the quarterly refinancing plan in November, or even cancel the 20-year Treasury bond—may not materialize quickly. The questionnaire did not provide a clear signal of supply reduction, nor does it mean that such adjustments have been ruled out.

However, Citigroup strategists maintain their forecast, believing that the U.S. Treasury will reduce the issuance volume of long-term bonds in the quarterly refinancing announcement in November, expecting that the auction sizes of 20-year and 30-year U.S. Treasuries will each be reduced by $3 billion. They point out that the relevant questions in the survey indicate that Treasury officials are considering taking this action.

Citigroup's report stated that since the last refinancing announcement, there has been a significant sell-off in long-term U.S. Treasuries, and the market has performed relatively weakly in several long-term bond buyback operations following the Treasury's announcement to raise the buyback limit. These factors will prompt the Treasury to shift long-term bond issuance towards short-term bonds.

Failed Debt Issuance Signals Combined with Rising Oil Prices Pressure Long-Term Yields

In addition to the Treasury survey, rising oil prices have also increased upward pressure on U.S. Treasury yields. Higher energy prices may reignite market concerns about inflation and affect investors' judgments regarding the Federal Reserve's future interest rate path. For long-term Treasuries, inflation expectations, future short-term rates, and the term premium demanded by investors will all influence yield pricing.

This also explains why the market reaction this time is concentrated on long-term U.S. Treasuries. Long-term Treasury prices are particularly sensitive to changes in supply expectations: if the market originally expected the Treasury to reduce long-term bond issuance, once the relevant signals are absent, investors may reassess the long-term bond supply they need to hold and the returns required to bear interest rate risks.

However, the rise in yields on Friday cannot be entirely attributed to the Treasury survey. Changes in oil prices are also mentioned as driving factors, and the survey results merely disappointed the market's previous expectations for policy adjustments without directly proving that the future scale of long-term Treasury issuance will remain unchanged.

November 4 Refinancing Announcement Becomes the Next Observation Point

The Treasury will announce the next quarterly refinancing plan on November 4, at which point the market will be able to further assess the government's specific considerations regarding borrowing needs, the issuance scale of different maturity bonds, and buyback arrangements.

The U.S. government is facing a persistent fiscal deficit, with interest payments on existing debt also increasing, which forces the Treasury to weigh financing costs, market demand, and debt maturity structure. Reducing long-term bond supply to lower long-term yields is one potential path of interest to the market, but it is not without constraints.

Before the formal announcement is made, the dealer survey provides a solicitation of market opinions rather than a policy commitment. The decline in long-term U.S. Treasuries and the renewed rise in yields on Friday reflect that the market had originally expected the Treasury to release a more proactive signal for supply reduction, but did not receive sufficiently clear evidence from this questionnaire. Moving forward, investors will continue to monitor whether the Treasury will adjust long-term Treasury issuance arrangements in the November refinancing plan and whether related measures can truly alleviate the supply pressure of long-term U.S. Treasuries.