(Bloomberg) — Treasury Secretary Scott Bessent should resist calls to ax the 20-year bond, as doing so could send borrowing costs higher, according to BNP Paribas SA.
Bond traders are speculating whether Bessent may further tilt the nation’s borrowing away from long-maturity bonds, where yields are trading near multi-decade highs, and instead toward short-dated debt. Reducing or eliminating issuance of the 20-year bond, which demands a higher yield than nearby tenors, has emerged as a radical option.
Such a move “will not work,” strategists led by Guneet Dhingra, head of US rates strategy, said. That’s because they see it as unlikely to drive yields “sustainably lower,” and could instead result in “unintended consequences” such as higher yields and lower liquidity.
“Eliminating the 20-year could be perceived as panic, and signal an exhaustion of the Treasury’s toolkit, encouraging bond vigilantes,” Dhingra and his colleagues Sebastian Mauleon and Vincent Zhou wrote in a note to clients. They maintained a recommendation to short 30-year Treasuries, targeting a yield rise to 5.8% from 5.64% currently.
The debate shows how Bessent’s unusual market interventions are bringing uncertainty to an area of US policymaking long known for being regular and predictable. That’s raising the stakes ahead of the Treasury’s quarterly refunding statement scheduled for Nov. 4, where the department lays out its issuance plans.
It will be the first such statement since officials unexpectedly revamped the buyback program for long-maturity Treasuries, dubbed by Bessent as “Treasury twist.” The move initially provided some relief to long-end bonds before yields resumed their advance to reach a 24-year high.
The Treasury made a subtle shift to its guidance at its last refunding statement, saying officials were evaluating potential future “changes” in coupon and floating-rate note sales rather than “increases” — opening the door to a future reduction in supply. Still, scrapping the 20-year bond outright remains a tail risk.
The 20-year maturity has struggled since it was reintroduced in 2020, leading to calls for the Treasury to ax it even before the latest run-up in yields. The US currently pays more to borrow at that maturity than for 30-year debt, an anomaly given longer tenors carry more risk.
The 20-year yield traded at 5.68% on Tuesday after hitting 5.75% a day earlier — its highest level since its return.
Treasury did halt sales of 30-year debt in 2001, but the fiscal backdrop was radically different, with budget surpluses reducing the government’s financing needs. Any move to eliminate a maturity today would force other tenors to absorb the borrowing at a time of elevated issuance.
Dhingra’s team said the failure of the expanded buybacks program to stem the rise in yields shows changes to supply have limited impact. Reducing long-end issuance would in turn require selling more bills maturing in less than a year, an expensive move as the Federal Reserve raises interest rates.
“Ultimately, the Treasury’s toolkit moves amount to a ‘band-aid on a gunshot wound’, in our view, unless core issues around inflation and deficits are addressed – and currently we see little sign of that happening,” they wrote. “Bond vigilantes would feel more encouraged the more times these ‘band-aid’ moves fail to drive yields lower.”
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