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BNP Warns Scrapping 20-Year Treasury Could Raise Yields
The US government borrows money by selling bonds.
Some traders think it could sell fewer long-term bonds, including the 20-year bond.
BNP Paribas says getting rid of that bond might not make borrowing cheaper.
It could even make borrowing costs rise or make the market less easy to trade in.
The 20-year bond has been costly for the government to issue, and its yield recently reached its highest level since it returned in 2020.
The Treasury is expected to explain its borrowing plans on Nov.
4.
BNP says lasting relief depends on addressing inflation and government deficits, not just changing which bonds are sold.
BNP Paribas strategists urged Treasury Secretary Scott Bessent to resist eliminating the 20-year Treasury bond.
They said cutting the bond’s issuance may not sustainably lower yields and could reduce liquidity or push borrowing costs higher.
Some bond traders are discussing shifting government borrowing away from long-term bonds toward shorter-dated debt.
The 20-year Treasury yield reached 5.75% on Monday, its highest level since the bond returned in 2020, before trading at 5.68% on Tuesday.
The Treasury’s next quarterly refunding statement is scheduled for Nov. 4 and will outline issuance plans.
- Who
- BNP Paribas strategists led by Guneet Dhingra; Treasury Secretary Scott Bessent is at the center of the issuance debate.
- What
- BNP Paribas warned that eliminating the 20-year Treasury bond could fail to lower yields and could push borrowing costs higher.
- Where
- The debate concerns US Treasury borrowing and the US bond market.
- When
- The warning came ahead of the Treasury’s quarterly refunding statement scheduled for Nov. 4; the 20-year yield hit 5.75% on Monday and traded at 5.68% on Tuesday.
- Why
- Traders are considering reducing long-maturity bond issuance amid high yields, while BNP argues that changing issuance alone may have limited impact and could create unintended consequences.
Reduce 20-Year Issuance
Retain the 20-Year Bond
Whether to eliminate the bond
Reduce 20-Year Issuance
Some traders are speculating that Treasury could further shift borrowing away from long-maturity bonds; eliminating the 20-year bond has been raised as an option.
Retain the 20-Year Bond
BNP Paribas strategists say eliminating the bond is unlikely to sustainably lower yields and could bring higher yields and reduced liquidity.
Effect of changing issuance
Reduce 20-Year Issuance
Reducing long-term bond supply could be considered as a way to ease pressure on long-end yields.
Retain the 20-Year Bond
BNP says supply changes have limited impact, pointing to the failure of expanded buybacks to stop yields rising; replacing long-term issuance with short-term bills could also be expensive as the Federal Reserve raises rates.
Key facts
- BNP Paribas recommendation
- Resist eliminating the 20-year Treasury bond.
- 20-year yield
- Reached 5.75% on Monday, its highest level since the bond’s return, and traded at 5.68% on Tuesday.
- Bond reintroduction
- The 20-year Treasury bond was reintroduced in 2020.
- BNP 30-year Treasury view
- Strategists maintained a short recommendation and targeted a 5.8% yield, versus 5.64% at the time of the report.
- Next refunding statement
- Scheduled for Nov. 4; it will set out Treasury issuance plans.
- Possible consequence of eliminating the bond
- BNP warned of potentially higher yields and lower liquidity.
- BNP’s broader concern
- The strategists said inflation and deficits need to be addressed for lasting relief in yields.
Quotes
BNP Paribas strategists led by Guneet Dhingra
BNP Paribas US rates strategists who authored the client note
“Ultimately, the Treasury’s toolkit moves amount to a ‘band-aid on a gunshot wound’, in our view, unless core issues around inflation and deficits are addressed – and currently we see little sign of that happening.”
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Sources
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