The US Treasury announced on August 5 that it will maintain the current auction sizes for nominal coupon and floating-rate notes, a policy that is expected to continue through at least the first quarter of 2027. This decision extends guidance in place since early 2024 and suggests a continued reliance on Treasury bills (T-bills) to fulfill the government's borrowing requirements.
This strategy means that T-bills, which mature in up to a year, will likely constitute a significant portion of outstanding debt. Bank of America Corp. analysts estimate that if this guidance holds, T-bills could reach nearly 25% of total outstanding debt by the end of fiscal year 2027. This would mark the highest proportion since 2004, excluding periods of financial crisis in 2008 and 2020 when T-bill issuance surged due to emergency spending.
While leaning on T-bills helps temper the Treasury's debt servicing costs due to their lower rates, it also introduces risks. The strategy makes debt-servicing costs more sensitive to front-end interest rate fluctuations, especially as investors anticipate potential monetary policy tightening by the Federal Reserve. Primary dealers, including major banks that purchase government debt directly, have adjusted their forecasts, now expecting no increases in coupon issuance sizes until May 2027 or later.
