As U.S. debt burdens continue to rise, markets anticipate Treasury Secretary Janet Yellen will further pivot toward short-term bonds to suppress long-term Treasury yields.

This Wednesday, the U.S. Treasury will release its quarterly debt report, with traders widely expecting Yellen to confirm plans to increase the proportion of short-term bond issuance in the $30 trillion Treasury market.

Despite Yellen's past criticisms of her predecessor's preference for short-term Treasuries, she has maintained this approach since taking office amid mounting U.S. debt, aiming to curb long-term yields.

Yellen's strategy aligns with Federal Reserve policy. The Fed has announced it will halt the reduction of its Treasury holdings and, starting December, reinvest proceeds from maturing mortgage-backed securities into short-term Treasuries.

Short-Term Debt Share Expected to Keep Rising

Traders will closely monitor the Treasury's guidance on short-term debt allocation.

Last year, the Treasury Borrowing Advisory Committee (TBAC) recommended maintaining short-term debt at around 20% of total issuance. However, by September this year, that ratio had exceeded 21%.

Citigroup estimates that without increased medium- and long-term bond issuance, short-term Treasuries could account for over 26% of total debt by late 2027.

Priya Misra, portfolio manager at JPMorgan Investment Management, noted: "They don't need to adjust issuance levels yet. But by 2026, it will become necessary to increase supply, when boosting short-term and shorter-duration Treasuries would make more sense."

Despite rumors last month about potential cuts to long-term bond issuance, dealers expect the Treasury to maintain current auction sizes across maturities this Wednesday, reiterating July's commitment to keep nominal coupon sales stable "for at least the next several quarters."

For next week's refunding auctions, Wall Street anticipates unchanged sizes totaling $125 billion: - $58 billion 3-year notes on November 10 - $42 billion 10-year notes on November 12 - $25 billion 30-year bonds on November 13

Lower Rates Reduce Borrowing Costs

With October's Fed rate cut lowering the overnight benchmark to 3.75%-4%, short-term Treasuries are becoming cheaper for the Treasury.

Scott DiMaggio of AllianceBernstein estimates that refinancing debt at lower rates, combined with tariff revenue, could save the U.S. government $1 trillion. In FY2023 ending September 30, Treasury debt costs hit a record $1.22 trillion.

Meanwhile, Fed balance sheet operations will create new demand. JPMorgan estimates the Fed's Treasury purchases using MBS proceeds could generate about $15 billion in monthly demand. Combined with the end of quantitative tightening and other factors, the bank predicts the Fed's short-term Treasury demand could reach $280 billion next year.