The US Treasury is facing a pivotal decision: whether to cut back or even eliminate 20-year bond issuance, which was restarted in 2020.

Several Wall Street institutions have recently received signals from clients suggesting the Treasury may send a clear message on 20-year issuance in its quarterly refunding statement on November 4.

Deutsche Bank strategist George Saravelos, after visiting clients in New York, said talk of an "imminent suspension of 20-year issuance" has already emerged in the market; Citigroup has advised investors to position early to capture the opportunity for 20-year Treasuries to outperform 10-year Treasuries.

Citi expects auction sizes for both 20-year and 30-year Treasuries to be cut by $3 billion each, with the gap filled by increased issuance of short-term Treasury bills. If the 20-year is ultimately scrapped, funds would be reallocated toward the short end of the yield curve, changing the pricing logic for long-end assets as well.

Under pressure from long-term borrowing costs climbing to more than two-decade highs, Treasury Secretary Bessent's earlier move to expand Treasury buybacks has failed to effectively suppress long-end yields, fueling growing speculation about his next steps. Market attention is now focused on two key timestamps:

First, the routine questionnaire the Treasury sends to primary dealers this Friday. If it includes questions on the 20-year bond, it would be seen as an early signal of a policy change;

Second, the main text of the November 4 quarterly refunding statement, along with market opinions released the same day by the Treasury Borrowing Advisory Committee (TBAC).

The 20-year's chronic problem: a structural dilemma of high costs

Since its restart in 2020, the 20-year Treasury has consistently been an outlier in the US government bond market.

The 20-year yield has long been higher than both the 10-year and 30-year yields at either end, forming a so-called "hump" structure, meaning the Treasury must pay a higher price to fund at this maturity.

It is precisely on this logic that even former Treasury Secretary Mnuchin, who championed the 20-year's restart, publicly said in 2024 that the instrument should be eliminated, stating:

It is too costly for taxpayers.

With US Treasury yields broadly at multi-decade highs and interest expenses surging, this structural cost disadvantage has become increasingly prominent.

There is precedent. In 2001, the US Treasury announced it would stop issuing 30-year bonds, citing reduced borrowing costs. Although the decision drew strong criticism at the time, the 30-year was ultimately restarted years later.

Intensifying competition for capital weighs on long-end demand

The weakness in long-end Treasury demand has deep structural causes.

Morgan Stanley broad market fixed income head Vishal Khanduja noted that tech hyperscalers, to support AI infrastructure buildout, have recently issued large amounts of long-dated corporate bonds, directly competing with Treasuries for allocation dollars from asset managers such as pension funds.

At the same time, the structural shift from fixed-benefit pension plans to defined-contribution plans has also weakened a traditional pillar of long-end Treasury demand. The former, driven by liability management needs, has historically been one of the major buyers of ultra-long Treasuries.

Citi US rates strategy head Jason Williams said Bessent may attribute weak pension fund demand for Treasuries to increased long-end corporate bond supply, and use that as a policy basis for cutting or even eliminating the 20-year.

Buyback expansion falls short, Bessent's options narrow

Bessent has already taken a series of unconventional steps to try to push down long-end rates, including suddenly announcing a major expansion of Treasury buybacks just two weeks after the mid-August refunding statement.

The move raised concerns among market participants about whether the Treasury's "regular and predictable" debt management convention was being undermined. However, the buyback expansion had limited effect, with 30-year Treasury yields recently rising to their highest since 2002.

Last week's 10-year and 30-year auctions saw reasonably solid demand, but both involved the largest tails since 2000, indicating that the market's demand for higher yield compensation has not faded.

If Bessent decides to further reduce long-end issuance, the Treasury will face several alternatives: expanding short-term bill issuance, increasing 2- to 5-year supply, introducing one-year floating rate notes linked to the Secured Overnight Financing Rate (SOFR), or reducing the quarterly cash balance target.

The Treasury is scheduled to update its quarterly borrowing needs and cash balance forecasts on November 2.

Policy signals and market risks coexist

Not everyone believes scrapping the 20-year is a cure-all.

BNP Paribas warned last week that the move "could be interpreted by the market as a panic signal, suggesting the Treasury's policy toolbox has been exhausted, thereby encouraging bond vigilantes to step in and apply pressure." Strategists led by Guneet Dhingra also flagged in a client report "unintended consequences," including reduced market liquidity.

ING Group Americas head of research Padhraic Garvey offered a relatively blunt assessment:

If you want to do something, leave everything else alone and just cut the 20-year. Nobody likes the 20-year.

But he also said:

Our baseline expectation is that he keeps the status quo.

Garvey added:

For now, maintaining a steady pace of issuance across the entire yield curve is the sensible move. But I suspect the US Treasury is currently in a highly flexible state, and if it believes it can push down borrowing costs, it is fully prepared to shift issuance to different parts of the curve.