US Treasury needs to increase coupon issuance next year - HSBC

The U.S. Treasury Department said in early August it plans to keep coupon and floating-rate note issuance unchanged for at least the next several quarters, in a move which is likely to calm fears that more sales of longer-dated debt could send yields higher.

However, according to HSBC, relying too much on T-bills may create challenges.

“We expect coupon auction sizes to rise from May 2027; delaying maturity extension further risks a more abrupt and disruptive adjustment that could meaningfully add to term premium in long-dated Treasury yields,” Dhiraj Narula, U.S. rates strategist at HSBC, says.

“The longer the Treasury waits to increase coupon issuance, the greater the risk that eventual maturity extension needs to occur more quickly and becomes disruptive for markets,” he adds.

“The Treasury’s decision to lean on T-bills throughout the Fed’s quantitative tightening (QT) operations in 2022-25, and the continued choice to hold coupon supply steady, have thus far limited duration supply to the private sectors,” HSBC’s Narula recalls, before arguing this strategy cannot last as fiscal deficits are expected to rise.

U.S. 30-year Treasury yields hit fresh 29-year highs on Tuesday.