Bond Investors Are Watching Closely as the Bessent Treasury Plans $1 Trillion in New Borrowing

The U.S. Treasury Department is expected to borrow more than $1.5 trillion before the end of the year. (SAUL LOEB/AFP via Getty Images)

The biggest angst in the bond market this year has been the U.S. budget deficit and how the government plans to fund it.

That means the typically snore-inducing quarterly Treasury refunding announcements are likely to get more interesting. The Treasury will announce its quarterly refunding plans Wednesday. They should show that the government will be using more short-term Treasury bills to fund the debt—a trend that is expected to grow.

“This is probably one of the more important refundings because it is after the Big, Beautiful Bill and the debt limit increase,” said George Goncalves, head of U.S. macro strategy at MUFG. One facet of the quarterly refunding will be to raise funds for the Treasury’s General Account, depleted by government spending ahead of congressional approval to raise the debt ceiling.

The Treasury estimates borrowing about $1 trillion in the July to September quarter, as it replenishes its cash balance. The borrowing estimate is $453 billion higher than that announced in April, but it should fall to $590 billion in the October to December quarter.

How the government borrows is a big focus in the Treasury market because of the large sums involved. The federal deficit is about $2 trillion annually, and the government sells a variety of maturities to cover the gap.

While market pros expect the amount of Treasury bills to increase—for funding the deficit and refilling the Treasury General Account—they are also watching for any indication for plans to increase issuance for longer duration notes and bonds in two to 30-year maturities. The Treasury has said it would keep the current size of issuance for at least the next several quarters.

Recent comments from Treasury Secretary Scott Bessent have piqued curiosity around this particular announcement. Bessent said the Treasury will add to short-term funding, like Treasury bills. That makes sense, as the Trump administration anticipates lower interest rates in the future and therefore lower borrowing costs.

But leaning more heavily on bill issuance is also counter to what Bessent and other conservatives. They had criticized former Treasury Secretary Janet Yellen for not issuing more long-term debt to keep longer term borrowing costs down.

Bills can be issued in durations from just weeks to a year, and it should be cheaper for the government to issue those securities for now. Longer term debt typically carries a premium to encourage investors to hold on to bonds for a longer period.

“I suspect at the end of the day we won’t have a materially different understanding of Bessent’s intention when all is said and done,” said Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets. “We know they have a significant increased borrowing need, so if you aren’t increasing coupons, by definition, you are increasing bill supply.”

Strategists say the focus on shorter-term debt could actually help keep longer term rates lower.

“This is going to be ongoing increased issuance starting with bills, then it is going to be the coupons,” said John Briggs head of U.S. rate strategy at Natixis Corporate & Investment Banking. He said the percentage of bills in total Treasury supply is currently 21%, and he expects that could go as high as 25% over time.

“Right now it also makes sense from a timing perspective because you are expecting the Fed to cut rates,” said Briggs. “Rolling short makes sense. I think there is enough demand for them. The market isn’t showing really much sign of being oversupplied with bills now.”

A new law is also expected to boost demand for stablecoins, which are backed by Treasuries. Bills should benefit from that, Briggs said.

The Treasury is also expected to announce plans to increase its buybacks in the 10-year to 30-year durations to improve liquidity. Briggs said the Treasury could increase its purchases from $8 billion in the May to August period to $12 to $16 billion.

Strategists say yields could rise if Treasury doesn’t increase the size of the buybacks.

Now that the Trump administration is announcing new tariff agreements, including a major one of 15% for the European Union, the market will have more information on how tariffs could affect the economy, inflation, and even the Treasury’s coffers.

Goncalves said the Treasury might address that in its refunding announcement. The Treasury reported that customs duties totaled $27 billion for June, and Goncalves said that tariff revenue should increase to as much as $35 billion a month soon.

“That could actually help Treasuries,” he said.

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