By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The U.S. Treasury is widely expected this week to announce its intention to keep note and bond auction sizes unchanged over the next 12 months, at least, as it likely continues to issue more bills and shorter-term debt to manage a sizable fiscal deficit.
The Treasury will release its quarterly borrowing estimates on Monday at 3:00 p.m. ET (2000 GMT), followed by the quarterly refunding on Wednesday at 8:30 a.m. ET (1330 GMT). The refunding outlines details of the Treasury’s financing plans for the upcoming quarter, including auction sizes for three-year and 10-year notes and 30-year bonds.
The government’s top fiscal authority has held bond and note auction sizes steady since February 2024 – a stance unlikely to change until late next year or early 2027, analysts said.
“The (yield) curve has not steepened enough to the point that the Treasury will respond aggressively with their issuance patterns,” said Brendan Murphy, head of fixed income, North America at Insight Investment.
“There certainly has been more focus and pressure on the long end. The Treasury will likely adapt to that by issuing more bills and less coupons.”
The share of Treasury bills in the overall debt mix is expected to climb further from its current 21%, analysts said, as the government leans more heavily on short-term borrowing.
Net bill issuance for 2026, excluding Federal Reserve purchases, is expected to rise to $555 billion from $344 billion this year, while net issuance of coupons – Treasury notes and bonds that pay interest – is seen falling to $1.5 trillion from $1.9 trillion this year, J.P. Morgan estimates showed.
Analysts said the end of the Fed’s balance sheet reduction program, also known as quantitative tightening (QT), will help keep debt issuance steady as it reduces the Treasury’s financing needs. Under QT, the Fed allows bond holdings to mature without reinvestment, effectively increasing Treasury’s borrowing requirements. To redeem maturing debt held by the Fed, the Treasury draws from its cash balance at the central bank, which it must then replenish by issuing new securities.
The end of QT reverses that process.
The Fed also announced last week it will start reinvesting all proceeds from maturing mortgage-backed securities into T-bills starting December 1, a move likely to encourage more bill issuance.
“You probably need to increase bill supply by about $600 billion if the Fed is reinvesting mortgages into bills,” said Joseph Abate, head of rates strategy at SMBC Nikko Securities.
“It may seem like a lot, but if the Fed is there buying, $600 billion hopefully is not going to be hard to digest.”
LOWER BORROWING ESTIMATES
Economists overall foresee lower borrowing estimates for the fourth quarter. In the last July announcement, the Treasury said it expected to borrow $590 billion in the last three months of 2025, with a projected cash balance of $850 billion by end-December.
Jefferies Chief U.S. Economist Tom Simons said, in a research note, that he expects a moderate downward revision in net borrowings in the fourth quarter to $525 billion due in part to stronger-than forecast tariff revenue.
J.P. Morgan also expects slightly lower-than-expected borrowings in the fourth quarter of $564 billion and $639 billion in the first three months of next year.
The Treasury said in July that it expected to borrow $1.007 trillion in the third quarter partly to replenish its cash balance that dwindled during the latest debt ceiling episode. It is set to reveal the actual borrowing total later on Monday.
In the meantime, strong demand for T-bills has allowed the Treasury to delay increases in longer-dated debt auctions, a strategy that has raised concerns about the potential risk of relying too much on short-term funding.
Analysts warned that over-reliance on short-term borrowing could increase volatility in financing the deficit and heighten rollover risks if market conditions shift.
That said, the fiscal picture seems to have evolved, analysts said.
J.P. Morgan has revised lower its 2026 U.S. deficit forecast to $2.035 trillion from $2.125 trillion, citing a $350 billion boost in tariffs. Other financial institutions such as SMBC Nikko Securities also slightly lowered their deficit estimates for next year.
One potential complication, however, is a looming U.S. Supreme Court ruling that could determine whether President Donald Trump’s authority under the International Emergency Economic Powers Act extends to imposing tariffs without congressional approval.
If the ruling goes against Trump, the U.S. government would have to return hundreds of billions of dollars in tariffs. The Supreme Court is set to hear oral arguments on November 5, with a decision likely before year-end.
“Uncertainty around the future of tariff collections is hugely important for the overall deficit and issuance needs by the Treasury,” said Zachary Griffiths, head of investment grade and macro strategy at CreditSights.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Andrea Ricci)
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