Will cancelling 20-year U.S. Treasury bonds backfire? BNP Paribas warns it could worsen market sell-off; maintains prediction of 30-year yield rising to 5.8%

Zhitong Finance APP has learned that BNP Paribas has warned that US Treasury Secretary Janet Yellen should resist calls to cancel the issuance of 20-year US Treasuries. The bank states that although this measure appears aimed at lowering long-term financing costs, it may backfire by not only failing to sustain lower Treasury yields, but could also increase borrowing costs and weaken market liquidity.

As long-term US Treasury yields hover near multi-decade highs, bond traders are discussing whether the US Treasury Department will further adjust the structure of debt issuance by reducing the supply of long-term bonds and shifting toward shorter-term debt. Among these options, cutting or even completely canceling the 20-year Treasury issuance has become a more radical approach discussed in the market. Currently, the 20-year Treasury requires a higher yield than the 30-year, resulting in an inverted yield curve where longer maturities usually offer higher yields, which is not the case here.

BNP Paribas strategists led by US Rates Strategy Chief Guneet Dhingra believe that this approach “won’t work.” They point out that canceling the 20-year Treasury is unlikely to sustain a drop in overall yields and could instead lead to higher yields and further declines in market liquidity.

BNP Paribas believes that, if the Treasury directly cancels the 20-year bond, the market may interpret it as a “panic” move in the face of persistently rising long-term rates and see it as a sign that the Treasury is running out of policy tools to stabilize the bond market. This, in turn, could spur so-called “bond vigilantes” to increase their selling. BNP Paribas therefore continues to recommend shorting 30-year Treasuries, forecasting their yield will rise from the current approximate 5.64% to 5.8%.

As the debate on debt issuance policy heats up, the US Treasury will release its Quarterly Refunding Statement on November 4, which will disclose the next phase of Treasury issuance plans. This statement is drawing particular attention as it will be the first following the Treasury’s unexpected adjustment to its long-term Treasury buyback plan. Janet Yellen previously referred to this operation as a “Treasury twist operation,” which temporarily eased selling pressure on long-term Treasuries; however, yields subsequently rose again to 24-year highs.

In the previous Quarterly Refunding Statement, the Treasury subtly changed its language, saying it is evaluating potential “changes” in the issuance of future fixed-rate and floating-rate notes, rather than previously stating it would “increase” supply—leaving room for a future reduction in some maturities. However, BNP Paribas still considers a complete cancellation of the 20-year Treasury as a low-probability tail risk scenario for now.

Since its reintroduction in 2020, the 20-year Treasury has faced both demand and pricing challenges. Calls to cancel this maturity were already present even before the recent surge in yields. On Tuesday, the 20-year Treasury yield stood at 5.68%, briefly reaching 5.75% the previous day—a new high since its 2020 reintroduction.

The US Treasury has precedence for canceling the issuance of long-term bonds. In 2001, the Treasury suspended the 30-year issuance, but at that time, the US government was running a fiscal surplus and had much lower financing needs than today. Now, with a large fiscal deficit and massive bond issuance, canceling a maturity would inevitably shift the financing burden to other terms.

BNP Paribas points out that the Treasury’s previous expansion of long-term Treasury buybacks has failed to stop yields from rising, indicating the limited impact of simply adjusting the supply of bonds on yields. If long-term issuance is reduced, the Treasury may need to increase the issuance of Treasury bills with maturities under one year—yet under the Federal Reserve’s rate hikes, this form of financing could become even more expensive.

BNP Paribas strategists believe that unless fundamental issues like inflation and fiscal deficits are addressed, simply tweaking issuance structures or expanding buybacks will not fundamentally lower long-term yields. As such measures repeatedly fail to curb rising yields, they could actually heighten bond investors’ concerns about the US fiscal outlook.