By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The U.S. Treasury is widely expected to maintain current auction sizes for notes and bonds when it announces financing plans this week, and will likely keep them steady for some time, forgoing issuing longer-dated debt to cover the government’s fiscal shortfall.
Investors will be looking for guidance as to how long the Treasury can hold off not raising the size of the debt auctions used to fund the ballooning U.S. budget deficit. The fiscal deficit is set to increase to a record $2.8 trillion over a decade with the passage of President Donald Trump’s “One Big Beautiful Bill,” estimates from the Congressional Budget Office showed.
The Treasury will release its quarterly borrowing requirements on Monday at 3:00 p.m. ET (2000 GMT) and its refunding plan on Wednesday at 8:30 a.m. ET (1330 GMT). It will also announce auction sizes for new issues of three-year and 10-year notes, as well as 30-year bonds, securities that make scheduled coupon payments to lenders who buy them.
Analysts said the Treasury can afford to delay increasing the auction sizes for longer-maturity debt given its focus on the issuance of more Treasury bills where demand has been robust. Treasury recently ramped up issuance of short-dated bills to replenish its cash balance which has shrunk to about $300 billion.
It raised the issuance of the bills with maturities under eight weeks, specifically after Trump’s spending bill was signed into law. The tax and spending legislation extended the debt ceiling as well by $5 trillion to more than $40 trillion.
Bank estimates of additional T-bill supply by the end of the year ranged from $620 billion to more than $800 billion. Analysts said money market funds are well placed to take on the flood of short-term debt issuance in the market.
Money market funds, with more than $7 trillion in assets, have been the biggest buyers of T-bills and will continue to be so, with historical third-quarter inflows averaging around $90 billion between 2015 and 2025, excluding 2020 and 2023, according to J.P. Morgan in a research note.
The U.S. bank believes money market funds are likely to absorb about 60%-80% of the upcoming T-bill supply in the next few months.
“We think the Treasury has the option of not increasing coupons through 2027…and quite possibly through 2028,” said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, in New York, referring to securities that make coupon payments such as Treasury notes and bonds.
“Incremental needs by the Treasury will be financed via T-bills…coupons will stay stable and will still raise money for the Treasury. But using T-bills is a sustainable and prudent strategy because demand is significant.”
The move away from the long end has also been partly driven by market considerations, with the Federal Reserve keeping the fed funds rate at a target range of 4.25%–4.50% since December 2024 due to inflation concerns. That has prompted investors to move away from the long end of the curve, keeping their yields higher.
By issuing more short-term debt, like T-bills, the Treasury can borrow at lower rates, reducing immediate interest expenses. Treasury Secretary Scott Bessent earlier said increasing long-term bond sales at current high rates was not cost-effective.
FARTHER OUT; BUYBACKS
Wells Fargo, in a research note, said it doesn’t expect the Treasury to begin increasing the size of long-dated auctions until February 2027. TD Securities also thinks auction sizes will remain steady until at least late-2026, noting that the bulk of those increases will likely occur on the front end and the belly or the intermediate part of the curve.
Tom Simons, chief U.S. economist at Jefferies in New York, also pointed out that given the still uncertain U.S. fiscal outlook, it would be sensible for the Treasury to stay put for now.
In the near term, he believes the U.S. economy may end up with more growth and revenue than the CBO’s fiscal deficit forecast, which Simons said does not include tariff income.
“When you’re fairly uncertain about the magnitude of near-term deficits and there are two-sided risks, it makes sense to keep the coupon auction sizes the same,” the Jefferies’ chief economist said.
Investors are also expecting changes to the Treasury’s debt buybacks launched in 2024, meant to enhance bond market liquidity. Buybacks provided a regular outlet for investors to sell back to the Treasury older and less liquid off-the-run securities across the yield curve.
Lou Crandall, chief economist at money market research firm Wrightson ICAP, thinks the Treasury will bump up buybacks in the 20-year and 30-year maturities, which have been “massively oversubscribed”.
He added that total offers for those debts have exceeded the operational maximum amount by nearly 7-to-1 in 20-year bonds and more than 5-to-1 in the 30-year sector.
In contrast, the Treasury has retired just $2.7 billion in par value terms in the seven- to 10-year sector, Crandall said.
“The more aggressive level of dealer participation in bond-sector buybacks probably does warrant an increase in redemption operations at the long end,” he noted.
“The taxpayer cost-savings of retiring less liquid off-the-runs in the bond sector are real, as are the market-functioning benefits.”
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Anna Driver)
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