BACK in 2001, the US government decided to stop issuing 30-year bonds. A quarter of a century later, the 20-year bonds could be next.
As rising borrowing costs and intensifying competition for investors’ money put pressure on its debt management strategy, the US Treasury could be forced to rethink its 20-year bond issuance.
With the next quarterly debt issuance plan due in November, investors will be watching for signs that US Treasury Secretary Scott Bessent is prepared to scrap the bond or reduce its supply to ease the government’s interest burden.
According to a Bloomberg report, speculation is growing on Wall Street that the 20-year US Treasury bond could be the next maturity to face the chopping block after the 30-year bonds.
The debate comes as Washington grapples with rising interest expenses, with Treasury yields climbing to levels last seen more than two decades ago.
For investors, the question is whether cancelling the 20-year bond would genuinely lower financing costs or create fresh uncertainty in the world’s largest government bond market.
The 20-year bond has been an unusual feature of the Treasury market since its return in 2020. Its yield has generally remained higher than those of both 10-year and 30-year Treasuries, making it a relatively expensive funding option for the government.
Even Steven Mnuchin, who revived the bond during his tenure as Treasury secretary, questioned its value in 2024.
“It’s just costly to the taxpayer,” he told Bloomberg.
The timing of the debate is significant. Treasury officials are scheduled to release their next quarterly refunding statement on Nov 4, outlining plans for government borrowing and bond issuance.
Investors will be looking for clues on whether Bessent intends to reduce or eliminate the 20-year bond, particularly after previous efforts to contain long-term borrowing costs failed to reverse the upward trend in yields.
Deutsche Bank strategist George Saravelos recently returned from meetings with clients in New York reporting “mumblings of a coming suspension in 20-year Treasury issuance”.
Citigroup is also advising clients to position for the 20-year bond to outperform the 10-year note on expectations of a “reduction, or perhaps cancellation, of the 20-year bond”.
For ING Groep’s head of research for the Americas, Padhraic Garvey, eliminating the maturity would be a straightforward way to change the Treasury’s funding mix.
“If you wanted to do something, leave everything and cut the 20-year,” he was quoted as saying by Bloomberg.
“Nobody likes the 20 years,” he added, although ING’s baseline view is that the Treasury will leave issuance unchanged.
Competition for investors
One reason the proposal is gaining attention is the growing competition for capital. Large technology companies, known as hyperscalers, are issuing substantial amounts of longer-dated corporate bonds to finance their artificial intelligence (AI) infrastructure investments.
These offerings compete with government debt for money from institutional investors, including pension funds, which have traditionally been important buyers of longer-maturity Treasuries.
At the same time, concerns about inflation have intensified following the Iran war’s impact on energy prices, while expectations of Federal Reserve interest-rate increases to contain price pressures have added to the challenge of selling longer-dated government debt.
“There is definitely a competition for capital that is happening,” Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management, tells Bloomberg.
He also highlights a structural shift away from defined-contribution pension plans, which had previously provided significant demand for long-dated Treasuries because of their liability-management requirements.
Citigroup expects the Treasury to consider cutting auction sizes for both 20-year and 30-year bonds by US$3bil each, with the shortfall financed through additional Treasury bill issuance.
Bloomberg quoted Jason Williams, Citigroup’s head of US rates strategy, as saying Bessent could use weaker pension-fund demand as a justification for reducing or cancelling the 20-year bond, potentially reflecting increased competition from corporate borrowing.
The pressure is evident in recent auctions.
Sales of 10-year and 30-year Treasuries early this month attracted solid demand, but both recorded their highest auction yields since 2000.
In August, the Treasury also subtly changed its guidance on future debt issuance, referring to potential “changes” in coupon and floating-rate note sales instead of possible “increases”.
The wording left the door open to reducing supply across the 20-year and 30-year maturities.
Not a clean solution
Despite the potential savings, scrapping the 20-year bond would not necessarily be a clean solution.
BNP Paribas warned that the decision “could be perceived as panic, and signal an exhaustion of the Treasury’s toolkit, encouraging bond vigilantes”.
Strategists led by Guneet Dhingra also cautioned that “unintended consequences” could include reduced liquidity in the Treasury market, according to Bloomberg.
There is also the risk of undermining the Treasury’s long-standing commitment to keeping its debt issuance “regular and predictable”. Abrupt changes could unsettle investors who rely on a consistent supply of securities to manage portfolios and meet long-term liabilities.
The precedent is not entirely reassuring. When the Treasury stopped issuing 30-year bonds in 2001, the move attracted criticism and the maturity was eventually restored.
Bessent’s recent expansion of the Treasury’s buyback programme has already raised questions about how far officials are willing to go to influence long-term borrowing costs.
The programme, which involves repurchasing older securities, was doubled in a surprise announcement just two weeks after the previous refunding statement in mid-August. Yet, long-dated Treasury yields have continued to climb, reaching levels last seen in 2002.
The Treasury Borrowing Advisory Committee, an external group comprising dealers, investors and other market participants, is expected to publish its views on Nov 4, Bloomberg notes.
Any reduction in longer-dated bond issuance would leave the government needing alternative sources of funding.
Besides increasing Treasury bill sales, officials could consider issuing more two-year to five-year securities or introducing a one-year floating-rate note linked to the Secured Overnight Financing Rate.
Another option would be to maintain a smaller cash balance.
The Treasury is due to update its quarterly projections for its cash balance and borrowing needs on Nov 2, providing another indication of how officials intend to manage financing requirements.
For now, the case for scrapping the 20-year bond remains balanced against the risk of unsettling a market that depends heavily on predictable issuance.
“At the moment, the sensible thing to do is to maintain a steady issuance profile right across the curve,” Garvey tells Bloomberg.
“But I suspect that the US Treasury is in a very flexible mood. I think they’d be perfectly prepared to morph issuance into different parts of the curve if they felt they could reduce interest costs,” he points out.
