Wall Street Is Preparing for Treasury to Cut or Cancel the 20-Year Bond
Twenty-five years after the Treasury stopped selling 30-year bonds, strategists are positioning for it to shrink or cancel the 20-year. Deutsche Bank's George Saravelos reports mumblings among New York clients of a coming suspension in 20-year issuance. Citigroup is advising clients to position for the 20-year to outperform the 10-year on the prospect of a reduction or cancellation. The next indication may come on Friday, when Treasury sends its questionnaire to primary dealers ahead of the November 4 quarterly refunding statement.
Per Bloomberg, Michael MacKenzie and Ye Xie report that the case rests on cost. Since its reintroduction in 2020, the 20-year has generally yielded more than both the 10-year and 30-year on either side of it, which means the Treasury pays a premium to issue it. Steven Mnuchin, who revived the maturity, said in 2024 that it should be cancelled because it is costly to the taxpayer. That premium matters more now that interest expense has surged with yields at multi-decade highs. Last week's 10-year and 30-year auctions drew solid demand but cleared at the highest yields since 2000.
The ground has been prepared. In August, Treasury changed its guidance from evaluating potential increases in coupon sales to potential changes, which opened the door to cutting long-dated supply. Citigroup expects a $3 billion reduction per auction in both the 20-year and 30-year, funded by additional bill issuance. Its head of US rates strategy, Jason Williams, suggests Bessent could cite weak pension fund demand, itself partly a result of heavy long-dated corporate issuance, as the reason. Morgan Stanley Investment Management's Vishal Khanduja describes a competition for capital, driven by hyperscaler borrowing and by the long decline of defined benefit pensions that once absorbed long Treasuries to match their liabilities.
The objections are about signalling and predictability. BNP Paribas warns that cancellation could be perceived as panic and as evidence the Treasury's toolkit is exhausted, inviting further pressure from bond investors, and could reduce liquidity. The Treasury's long-standing commitment to regular and predictable issuance has already been questioned after Bessent expanded buybacks two weeks after the last refunding. ING's Padhraic Garvey thinks the sensible course is a steady issuance profile and expects Bessent to leave the 20-year in place, while noting the Treasury appears to be in a very flexible mood.
The direction of the proposed fix deserves attention. Cutting long bonds and replacing them with bills lowers the immediate interest bill, because short rates sit below long ones today. It also shortens the average maturity of the debt, so a larger share reprices whenever short rates move, and it increases the government's reliance on money market funds and other buyers of short paper. Treasury has already asked dealers in past surveys about stablecoin demand for bills. The alternatives under discussion point the same way, including a one-year floating rate note tied to SOFR, larger two-to-five-year auctions, or a smaller cash balance. Each reduces what the government pays to borrow for long periods by borrowing for shorter ones.
What to watch is the November 2 borrowing estimate and the November 4 refunding statement. Expanded buybacks did not stop long-dated yields reaching their highest since 2002. If the next step is to sell fewer long bonds, the Treasury will be managing the long end by withdrawing from it, and financing the gap at the short end, where the Federal Reserve sets the price.