Bessent takes the helm on US debt sales after blasting Yellen

After repeatedly blasting Janet Yellen last year over her department's strategy for issuing federal debt, it's now up to Scott Bessent to make the call on sales of Treasuries, with bond dealers conflicted over what he'll do in a pivotal release due Wednesday.

In the past four straight so-called quarterly refunding plans, the Treasury has advised that it didn't expect to increase issuance of longer-dated securities "for at least the next several quarters," after a final bump up at the start of last year. Many dealers see that changing, in part because of past comments from Bessent, potentially watering it down to "a few" or "a couple" of quarters.

The former hedge fund manager, before he was picked by President Donald Trump as Yellen's successor, was one of a number of Republicans who charged Yellen with having artificially held down sales of longer-maturity Treasuries — which affect things like mortgage rates — to boost the pre-election economy. He also in August criticized the advance notice in the refunding statement as "the first time ever" the Treasury had offered forward guidance.

"This is going to be the key point of the statement on Wednesday," said Mark Cabana, head of US rates strategy at Bank of America Corp. "I can't help but think it's a new administration, they want to have their own guidance."

Should Bessent, who has yet to build out his team at the Treasury after being sworn in to the job just last Tuesday, remove the guidance entirely, dealers cautioned longer-term Treasuries may drop in anticipation of increased supply. Several still see the previous language being retained for now, although a number of them viewed it as a close call.

One challenge is that longer-term Treasury yields have jumped the better part of a percentage point since September — in part due to concerns about fiscal deficits and inflation in light of Trump's plans for more tax cuts and tariff hikes. With higher levies set to kick in across-the-board on Canada, Mexico and China starting Tuesday, the refunding this week takes place at a time of particular uncertainty about the rates outlook.

As of late Friday, 10-year notes yielded well over 20 basis points more than bills, which mature in up to a year, making them more costly to the Treasury, and raising the stakes for any move to boost longer-dated sales.

"It's a very different world now than back in 2023, when Yellen decided to lean more on bills," said Jason Williams, a strategist at Citigroup Inc. "Bill yields back then were higher than those on coupon-bearing debt, but that's not the case now and the absolute level of yields is also higher. Even if Bessent does want to extend the weighted average maturity of US debt, he'd want to do it in a slow and orderly fashion."

After a string of increases beginning in August 2023, the Treasury has kept its quarterly refunding auctions, which span 3-, 10- and 30-year maturities, at $125 billion. Even relatively modest shifts in size can have a market impact. Yields climbed after the August 2023 boost, and they dropped in the wake of a November 2023 move to temper the ramping up of issuance of longer-dated debt.

Given outsize US fiscal deficits, the amount of debt the Treasury has to sell over time continues to climb, and dealers say increased sales of longer maturities is inevitable at some point. The Treasury on Monday is set to release an update on broader borrowing needs and cash-balance estimates.

JPMorgan Chase & Co., Citigroup, Santander and Societe Generale are among firms that expect Bessent to leave his predecessor's guidance intact for now. Still, the consensus among dealers is that long-term debt issuance doesn't actually move higher until the November refunding, with some seeing potential for a bump as soon as August.

Cabana at Bank of America thinks it's possible the guidance will disappear completely — something that could lead some investors to see an increase in sales as soon as the May refunding.

BofA's Katie Craig, along with Cabana, wrote in a note to clients last week to expect Bessent to ask the Treasury Borrowing Advisory Committee, a panel of bond market participants, to undertake a study of investor demand for a potential boost in long-term debt sales.

The Fed

The politics of the issue came to the fore in mid-2024, with a paper by economists Stephen Miran — whom Trump has nominated to lead the White House Council of Economic Advisers — and Nouriel Roubini accusing Yellen's Treasury of manipulating the issuance of Treasuries. Yellen firmly rejected that idea, and one of her top lieutenants delivered a detailed speech to counter "misconceptions."

Meantime, there are other considerations, including uncertainty over when the Federal Reserve will halt its steady reduction in holdings of Treasuries — currently running at up to $25 billion a month. While Chair Jerome Powell last week offered no hint on when that might end, when it is phased out, that will reduce the amounts the Treasury needs to borrow from the public. The Treasury specifically asked dealers in a quarterly survey this month for their views on Fed balance-sheet policy changes ahead.

Along with a high degree of uncertainty about the fiscal outlook, "these are the two main factors that make the decision-making process a little bit more complicated moving forward, which on its own argues for maybe being a little bit less committal" in Wednesday's statement, said William Marshall, Goldman's head of US rates strategy. "There's a cost to giving guidance and then not following through."

Keeping the status quo for issuance sizes would put next week's refunding auctions on course for the following: 

• $58 billion of 3-year notes on Feb. 11
• $42 billion of 10-year notes on Feb. 12
• $25 billion of 30-year bonds on Feb. 13

The Treasury on Wednesday is also seen keeping issuance of floating-rate debt unchanged, while continuing to nudge sales of Treasury Inflation Protected Securities, or TIPS, higher.
Yet another complication for Bessent is managing the world's biggest bond market under the constraints of the federal debt limit, which kicked back in at the start of January. Any drawn-out episode in Congress over raising or suspending the limit will force the Treasury to slash bill issuance and spend down its cash buffer. 

"Once Bessent is kind of settled and we are through the debt-limit issue, then maybe they start poking around at longer-term issuance," said Blake Gwinn at RBC Capital Markets. "So this meeting could be kind of a wash."

Unless the Trump administration is able to rein in the deficit, now seen running at an historically high 6% or more of GDP for years to come, bigger auction sizes are looming — with consequences for yields, according to Marc Seidner, chief investment officer of non-traditional strategies at Pacific Investment Management Co. "That suggests to us that there should be a greater risk premium, a greater term premium in long-term debt and a steeper yield curve."

Jean Boivin, head of the BlackRock Investment Institute, sees 10-year yields headed back to 5% or above, from around 4.5% currently. While there's high uncertainty around the administration's specific plans, "tax cuts and other things will definitely continue the deficit's trajectory."