US Treasury to Hold Issuance Guidance as 30-Year Yield Hits 5.27%

The US Treasury is expected to keep its coupon-issuance guidance unchanged this week, shielding long-end yields as the 30-year rate trades near 5.27 percent, its highest since 2007.

"Political factors are dominating the decision with midterm elections approaching, and avoiding higher yields clearly serves the government's interests," said Jay Barry, a strategist at JPMorgan.

The Fed held its benchmark rate at 3.5%-3.75% on July 29, drawing dissents from three of 12 FOMC members who favored a quarter-point hike. The 30-year yield climbed to 5.27 percent, the 10-year reached 4.73 percent and the 5-year 4.45 percent, while headline PCE inflation ran at 3.7 percent in June, above the Fed's 2 percent target.

The Treasury's reliance on short-term bills has pushed T-bills toward 25 percent of outstanding debt, the highest since 2004 outside crisis periods, while JPMorgan projects a cumulative funding gap of about $3.7 trillion from fiscal 2027 through 2030. If the guidance is eventually dropped, markets could read it as a signal for more long-duration issuance, pushing yields higher.

The forward guidance, formed during the Biden administration, commits the Treasury to keeping coupon issuance unchanged "for at least several quarters." Most primary dealers expect the wording to survive this week's quarterly refunding announcement, according to Bloomberg. Treasury Secretary Scott Bessent has criticized the policy for artificially suppressing long-term borrowing costs, but the political calculus has shifted with elections looming.

T-Bill Reliance Grows as Deficits Persist

Since Bessent took office, the Treasury has funded itself increasingly through short-term bills, a strategy that lowers current borrowing costs while exposing the debt stock to short-end rate swings. Bank of America estimates that if the Treasury holds coupon issuance steady through fiscal 2027, T-bills would approach 25 percent of outstanding debt, the highest since 2004 excluding the global financial crisis and pandemic. The Congressional Budget Office puts the federal deficit at about $1.4 trillion in the first nine months of fiscal 2026, and the Treasury expects to borrow another $671 billion in the July-September quarter.

Short-term bills are not short of buyers. Money market fund assets have climbed to about $8.3 trillion, according to Crane Data, while Bessent has said stablecoin issuers could become a major new buyer of T-bills. The Fed is also reinvesting proceeds from maturing mortgage-backed securities into bills, adding support at the short end.

A Delayed Adjustment Carries Risk

A minority of institutions expect the Treasury to tweak its wording this week. Deutsche Bank, Wells Fargo and CIBC Capital Markets all anticipate a change that would leave room to expand coupon issuance as early as February. RBC Capital Markets' Blake Gwinn said the adjustment will happen eventually, and the longer it is delayed, the larger the market shock when it comes.

Even if the Treasury expands coupon issuance, new supply is likely to concentrate at the front of the curve rather than in 10-, 20- or 30-year maturities, where borrowing costs are highest. The Treasury said in May it was evaluating issuance structures balancing cost, risk and structural demand. TD Securities strategists Gennadiy Goldberg and Molly Brooks read that language as pointing to a preference for front-end additions. If issuance is held steady, the Treasury plans to auction $58 billion of 3-year notes on Aug. 11, $42 billion of 10-year notes on Aug. 12 and $25 billion of 30-year bonds on Aug. 13.

The stakes extend beyond the Treasury market. Mortgage rates are closing in on 7 percent, and the iShares 20+ Year Treasury Bond ETF remains more than 40 percent below its all-time high. Futures markets price about 64 percent odds of a Fed hike at the September meeting, meaning the bond market is doing some of the Fed's tightening on its own.

This article is for informational purposes only and does not constitute investment advice.