The U.S. Treasury Department has maintained its debt issuance guidelines as expected, while an increase in financing demands may intensify the "dependency" on short-term debt.

On Wednesday, the U.S. Treasury Department maintained its previously announced guidance on future debt issuance, signaling that despite rising financing demands from the federal government, it does not expect to adjust the scale of medium- and long-term Treasury (notes and bonds) auctions for an extended period, at least until 2027. According to current forecasts, Treasury officials expect to maintain the issuance levels of nominal interest-bearing securitiesnamely coupon-bearing Treasuriesand floating rate notes unchanged for at least the next few quarters. Since early 2024, the Treasury has consistently used the same wording in their quarterly debt issuance strategy statements. As early as February 2025, the Treasury Borrowing Advisory Committee (TBAC), composed of bond investors, primary dealers, and other market participants, suggested that the Treasury reconsider its forward issuance guidance. In May 2026, the committee discussed potential adjustments once again. However, the debt management team led by Treasury Secretary Yellen has long resisted suggestions from Wall Street to revise the future guidance on U.S. Treasury issuance, to the extent that many primary dealers no longer expect changes to this policy in the near term. This forward guidance dates back to the Biden administration. Yellen has previously criticized this approach, arguing that it aims to suppress long-term borrowing costs ahead of the November 2024 elections. Now, facing midterm elections is the Republican government led by former President Trump, and any signals suggesting an increase in Treasury auction sizes could lead to further rises in Treasury yields, which would not be in Trump's interest. The TBAC stated in a release on Wednesday that it "still believes the current forecasts may need to increase the issuance of coupon-bearing Treasuries during the new fiscal year starting October 1." The committee stated, "Members recommend that the Treasury consider updating its forward guidance wording to retain policy flexibility as it enters fiscal year 2027." The committee emphasized that, as always, clear communication and a regular, predictable operational framework will help market participants adapt to any future changes that may arise. Dealers have previously warned that the longer the Treasury waits, the greater the potential impact of actual policy adjustments, and the more abrupt the market reaction may be. It is worth noting that since taking office, Yellen has relied on short-term Treasury bills (with maturities of up to one year) to meet the government's growing financing needs. As short-term Treasury bill rates are relatively low, this strategy has helped control the Treasury's financing costs. Last week, the benchmark 10-year U.S. Treasury yield rose to its highest level since Yellen took office, further increasing the cost of financing through long-term bonds. Meanwhile, the government's financing needs continue to expand. The Treasury upgraded its estimate of financing needs for this quarter to $739 billion, an increase of $68 billion from its May forecast, primarily due to anticipated declines in cash inflows. Over time, the current U.S. Treasury auction sizes will be unable to continue assisting the Treasury in raising new fundswhich means if the issuance strategy does not change, the proportion of short-term Treasury bills in the overall debt will inevitably continue to rise. According to calculations by Bank of America, if the Treasury maintains the issuance levels of coupon-bearing securities (i.e., notes and long-term bonds) unchanged before the end of fiscal year 2027, the share of short-term Treasury bills in total outstanding government debt will rise to nearly 25%, the highest level since 2004 (excluding the extraordinary circumstances during the COVID-19 pandemic and the global financial crisis). The TBAC had previously suggested an average target of around 20% for the proportion of short-term Treasury bills. However, this reliance on short-term Treasury bill financing also comes with risks. The current proportion of short-term Treasury bills in outstanding government debt is already at a historical high, and continued reliance on short-term Treasury bills means that debt service costs will be more susceptible to shocks in short-term interest rates, even as investors are betting that the Federal Reserve may be forced to tighten monetary policy in the coming months. The U.S. Treasury Department highly depends on short-term Treasury bills. Regarding the continued reliance on short-term Treasury bill financing, the Treasury currently has reason to believe that strong demand can at least temporarily absorb new supply. According to data from Crane Data LLC, the size of money market funds has currently grown to approximately $8.3 trillion. Yellen has also indicated that stablecoin issuers may become a new source of demand for short-term Treasury bills in the future. Additionally, the Federal Reserve is increasing its holdings of U.S. Treasuries, partly due to reinvesting funds from maturing mortgage-backed securities into short-term Treasury bills. The Treasury also maintained the viewpoint proposed in May that if it increases the issuance of coupon-bearing Treasuries in the future, the policy would be tilted toward the shorter end of the yield curve. The Treasury stated that it is monitoring the growing demand for short-term Treasury bills and continues to evaluate the situation, "focusing on structural demand trends, as well as the potential costs and risks associated with different issuance structures." As for next week's $125 billion refinancing bond auction, it will include: $58 billion of 3-year U.S. Treasury bonds issued on August 11; $42 billion of 10-year U.S. Treasury bonds issued on August 12; and $25 billion of 30-year U.S. Treasury bonds issued on August 13. The U.S. Treasury stated that this refinancing operation will raise approximately $28.7 billion in new funds.