Treasury weighs debt changes as U.S. deficit hits $1.99 trillion

By Daniel Okafor

The U.S. federal budget deficit hit $1.99 trillion in the fiscal year ended Sept. 30, up $200 billion from the prior year. The Treasury Department said on Wednesday that it is considering debt-issuance changes after the next several quarters as the government prepares to borrow more.

At 6.2% of GDP, the deficit was described as far too high to be sustainable. Treasury Secretary Scott Bessent had set a 3% of GDP target when he took office. The gap leaves Treasury weighing how much debt to sell and at which maturities.

What could Treasury change?

Treasury plans to “engage with a variety of market participants to better understand evolving Treasury supply and demand dynamics.”

“In considering any changes, Treasury will be guided by the objective of financing the government at the lowest cost over time,” the statement said.

A panel of Wall Street experts that advises Treasury on debt management expects changes in auction sizes sometime this fiscal year, which ends in September. The Wednesday announcement left long-end coupon issuance sizes unchanged for now.

Analysts disagree on which changes Bessent might favor. Wall Street has been on high alert since mid-August, when Bessent surprised the market by increasing the size of buybacks of long-dated Treasuries as yields climbed to multidecade highs.

Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, wrote that Bessent has kept Wall Street on its toes by forgoing the “regular and predictable” approach favored by his predecessors.

Bessent might cut the size of auctions for 20- and 30-year Treasuries to help keep a lid on yields. At the extreme, Stanley said, there is buzz that Treasury could eliminate 20-year bond auctions altogether.

Other analysts think the government may need to take steps to borrow more at the longer end. The benchmark 10-year Treasury yield has fallen in recent weeks to roughly the 5% level. Holding it near that level could ease pressure on 30-year mortgage rates, which hit 7.4% in October.

Why do lower yields still complicate the plan?

Lower yields bring a complication. Investors have flocked to the safety of Treasury notes and bonds in recent weeks. Part of that demand reflects fears that the AI trade could falter. Such fears could also trigger a pullback in the enormous spending that has benefited the stock market and economy.

For Treasury, the immediate issue remains volume. The government must sell enough securities to fund the deficit while minimizing its financing cost. One path would cut long-end auctions to cap yields; other analysts see a case for more long-end borrowing.

What is Treasury selling next week?

Treasury said it will sell $125 billion in notes and bonds next week. The issuance will refund $97 billion of notes maturing on Nov. 15 and raise $28 billion in new cash.

• Nov. 9: $58 billion in 3-year notes.
• Nov. 10: $42 billion in 10-year notes.
• Nov. 12: $25 billion in 30-year bonds.

Treasury also plans to convert the 7-year note from a monthly new issue to a quarterly new issue with two reopenings. The new schedule pairs quarterly new issues with two reopenings.

Treasury said it will continue evaluating possible enhancements to buyback operations. In August, it tripled the size of its buybacks in the 10-year-to-30-year sector to $6 billion each. The review sits alongside Treasury’s stated effort to understand evolving supply and demand.

The November sales set the immediate funding benchmark. Any auction-size change before the fiscal year ends in September will show whether Bessent restrains long-end supply to cap yields or accepts more borrowing at that maturity. Either choice must fund a deficit running at 6.2% of GDP.