Bond Traders Eye Treasury’s Next Move on T-Bill Supply Strategy

Investors are preparing for U.S. Treasury Secretary Scott Bessent to lean more heavily on shorter-term debt issuance as part of his funding strategy a move aimed at keeping long-term bond yields in check amid the country’s rising debt burden.

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Wall Street’s largest bond dealers expect Bessent to outline his approach as early as Wednesday, when the Treasury Department releases its quarterly refunding statement. The focus will be on whether the U.S. continues to favor shorter maturities in its $30 trillion Treasury market, signaling a shift in how the government manages its financing mix.

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Analysts from JPMorgan Chase & Co. and Goldman Sachs Group Inc. are closely watching for any signs that the Treasury might reconsider its “optimal” funding balance heading into 2026. Despite previously criticizing his predecessor Janet Yellen’s reliance on short-term bills, Bessent has largely maintained her approach, surprising some market participants.

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“There’s no immediate need to change issuance levels,” said Priya Misra, portfolio manager at JPMorgan Investment Management. “But by 2026, as funding needs grow, it would make sense to increase supply through bills and other short-dated Treasuries.”

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Bessent has already expanded Treasury bill auction sizes to record levels, signaling his willingness to rely on shorter maturities. That approach may get additional support after the Federal Reserve announced it will halt the reduction of its Treasury holdings while continuing to wind down its mortgage-backed securities portfolio. Beginning in December, proceeds from maturing mortgage assets will be reinvested in bills, providing fresh demand from one of the Treasury market’s biggest buyers and allowing Bessent more flexibility to issue short-term debt.

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At the heart of Bessent’s strategy is the need to ease long-term borrowing costs a critical factor influencing everything from mortgage rates to corporate lending while managing a ballooning national debt. The Treasury’s efforts to suppress the 10-year yield align with a broader global trend, as demand for longer-dated bonds has waned, prompting countries like the UK and Japan to trim their own long-term issuance.

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Although there has been speculation that the U.S. could reduce the size of longer-term note and bond sales, most dealers expect Wednesday’s announcement to maintain current auction sizes. Officials are likely to reaffirm their July commitment to keep sales of nominal interest-bearing securities steady for several quarters.

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This suggests the Treasury will continue to lean on T-bills to cover a budget deficit that remains near $2 trillion annually, despite an uptick in tariff revenue.

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For the upcoming refunding auctions, Wall Street anticipates no changes, leaving total issuance at $125 billion, consisting of:

• $58 billion in 3-year notes (Nov. 10)
• $42 billion in 10-year notes (Nov. 12)
• $25 billion in 30-year bonds (Nov. 13)

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Market participants will also be paying close attention to the Treasury’s stance on the share of bills in its overall funding structure. The Treasury Borrowing Advisory Committee (TBAC) previously recommended maintaining an average 20% bill share over time, though as of September, it already exceeded 21%.

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If issuance patterns remain unchanged, Citigroup Inc. projects that bills could make up more than 26% of total Treasury debt by the end of 2027.The Fed’s Role and Rate Cuts

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Short-term bills are becoming increasingly cost-effective for the Treasury thanks to the Fed’s recent rate cuts. Last week, the central bank lowered its benchmark overnight rate to a range of 3.75%–4%, and traders anticipate another cut as early as December.

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According to Scott DiMaggio, head of fixed income at AllianceBernstein, the combination of lower refinancing costs and tariff revenues could save the government up to $1 trillion. Still, the Treasury faces a heavy interest burden, having spent a record $1.22 trillion in debt service during the last fiscal year.

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The Fed’s balance-sheet management could further aid Treasury funding. Using proceeds from maturing mortgage debt to buy Treasuries may add around $15 billion per month in demand, JPMorgan estimates. Combined with the end of quantitative tightening and other technical factors, Fed purchases could total as much as $280 billion in bills next year.

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Bessent, who is leading the vetting process for the next Fed chair with Jerome Powell’s term expiring in May, has been outspoken on central bank policy. In a September essay, he criticized the Fed for excessive bond purchases in prior years and for venturing too far into fiscal policy territory.

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As President Donald Trump reshapes the Fed’s leadership, these debates could influence how policymakers manage a $6.6 trillion balance sheet, down from nearly $9 trillion in 2022 following pandemic-era stimulus. Some investors even speculate about coordination between the Treasury and the Fed to help anchor long-term yields.

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Ironically, in 2024, Bessent himself was among Republicans who accused Yellen of overusing short-term bills to hold down borrowing costs and stimulate the economy ahead of the election charges she denied, insisting the Treasury’s goal was simply to minimize financing costs over time.

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Now, as the nation faces record debt and persistent fiscal pressures, Bessent appears ready to embrace the very playbook he once criticized relying on shorter maturities to navigate an era of rising deficits, shifting Fed policy, and uncertain investor demand.

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