Treasury Is About to Reveal Its Borrowing Plans. Why That’s Important.

Federal Reserve Chair Jerome Powell at a news conference on Wednesday. (Jim Watson / AFP / Getty Images)

Key Points

• The Treasury Department’s borrowing plans could lower the 10-year Treasury note yield by a third of a percentage point over the medium term.
• Increasing the share of Treasury bills in federal financing is seen as “backdoor QE” by BofA strategists, similar to the Fed’s quantitative easing.
• Tether, a stablecoin issuer, holds approximately 2% of the total Treasury bill supply, making it a significant nonsovereign holder.

The Federal Reserve’s policy meeting this week sent shock waves through the markets, with Chair Jerome Powell’s warning that a further interest-rate cut at its December gathering was far from assured, contrary to expectations that another quarter-percentage-point move was all but certain.

By contrast, it’s unlikely that a similar impact will be felt when the Treasury Department outlines its borrowing plans this coming week. Treasury plans typically don’t get nearly the attention of central bank announcements. But its statement could affect bonds, and in turn other asset prices.

That’s because the mix of Uncle Sam’s securities sales could affect yields just as Fed operations do. By continuing to lean heavily on short-term Treasury bill sales and not increasing issuance of lengthier notes and bonds, the government could lower the yield on the benchmark 10-year Treasury note by a third of a percentage point over the medium term, according to one estimate.

That’s no small matter to the Trump administration. Treasury Secretary Scott Bessent said last February that he and President Donald Trump were focused on the 10-year Treasury, which importantly influences other borrowing costs, especially home mortgage rates.

The president further said in June that he wanted to refinance $9 trillion in maturing Treasuries with short-term debt, which would be replaced after Powell’s term as Fed chair ends next May. “Then we’re gonna get somebody into the Fed who’s going to be able to lower [the rates],” he said in an interview with Fox Business.

Boosting T-bills’ portion of total Treasury financing, from around 20% of the total currently—while holding issuance of notes and bonds steady—would have the same effect as reducing the supply of 10-year notes by $1 trillion over the current fiscal year and next, according to a report this past week from BofA Securities’ rate strategists led by Meghan Swiber. They estimate that would reduce the benchmark yield by between 31 and 34 basis points (or hundredths of a percentage point) over time.

In effect, the BofA strategists write, increasing the T-bill share of federal financing amounts to “backdoor QE,” or quantitative easing. That’s when the Fed purchases securities, which colloquially would be called “printing money.”

There is no small irony in this. Last year, Bessent criticized the Treasury, then led by Janet Yellen, for leaning on short-term T-bills in order to hold down longer-term rates ahead of the 2024 election. But he has continued that Biden administration borrowing schedule.

Bessent was joined in that criticism last year by Stephen Miran, who co-authored a paper with Nouriel Roubini. “Activist Treasury issuance” practices, they wrote, were “dynamically managing financial conditions and through them, the economy, usurping core functions of the Federal Reserve.” Miran, of course, is now a Fed governor while on leave from the president’s Council of Economic Advisers, and this past week dissented for a second time in favor of more aggressive rate cuts by the central bank.

Reducing the available supply of risk-free longer-term securities results in easier financial conditions, former Fed Chair Ben Bernanke wrote in a Washington Post op-ed column in November 2010, as the central bank was undertaking another round of Treasury and agency mortgage-backed securities, or MBS, purchases. Conversely, the supply of longer-dated government paper can be kept low by the Treasury limiting their sales.

Most analysts look for the Treasury to hold its longer-maturity issuance steady in the coming quarter. But a surprise cut in the 10-to-30-year range could prompt a yield decline of 10 basis points and as much as 20, according to a note this past week from Wells Fargo strategist Angelo Manolatos. More than the actual size of the reduction, the market will react to the signal sent by such a shift in financing plans, he added.

Manolatos sees the Treasury continuing to ramp up its T-bill issues to 24% of the market by the end of 2027, from 21.5% as of September. J.P. Morgan fixed-income strategists led by Jay Barry estimate that T-bills’ share could hit 27% by the end of 2028, if the Treasury solely used bills and didn’t boost note and bond auctions.

Stepped-up bill issuance by the Treasury would jibe with the Fed’s announced end of quantitative tightening, which was anticipated. In addition to no longer letting $5 billion a month of Treasury securities run off at maturity, it will reinvest principal payments on agency mortgage securities into T-bills. JPM’s strategists estimate that the Fed will buy $15 billion a month in T-bills from MBS proceeds plus another $8 billion a month to offset bank reserve drains from currency demand.

Another growing source of demand comes from stablecoins, which are mainly backed by T-bills. The largest is Tether’s, which had $157 billion of its stablecoins outstanding at the end of the second quarter, backed by $105.5 billion of T-bills and $16.3 billion overnight repurchase agreements backed by Treasuries.

That makes Tether one of the largest nonsovereign T-bill holders, with about 2% of total supply. (By comparison, the Fed held $195.5 billion of T-bills out of its $4.2 trillion Treasury portfolio as of Wednesday.) One recent paper estimates that a one-percentage-point increase in Tether’s share of the T-bill market could reduce yields by 14 to 16 basis points.

One big question mark is the fate of tariffs imposed by the White House under the International Emergency Economic Powers Act. The Supreme Court is considering the legality of the IEEPA tariffs and will hear oral arguments on Wednesday. If the tariffs are struck down, J.P. Morgan estimates $100 billion of tariff revenue could be eligible for refunds, though it expects actual refund payments would be less and a smaller drain of the Treasury’s cash.

Beyond influencing interest rates and the economy, Treasury’s plans affect federal debt, which just passed $38 trillion, with red ink likely headed to $2 trillion annually over the coming decade, according to the Committee for a Responsible Federal Budget. Every basis point saved in financing costs counts. Interest on the national debt is headed to $1 trillion annually, the fiscal watchdog group adds, which exceeds defense expenditures. But leaning too heavily on T-bills can backfire if short-term rates would have to rise materially.

Write to Randall W. Forsyth at randall.forsyth@barrons.com