By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 31 (Reuters) - The U.S. Treasury is likely to keep the current size of debt auctions for the upcoming quarter unchanged when it announces financing plans under a new administration next week, even as the economy faces a worsening budget deficit.

Investors, however, will look for guidance in the Treasury's statement about the timing of future increases to address mounting financing needs. Forecasts from U.S. banks on the time frame for raising auction sizes ranged from as early as August to sometime in 2026.

Next week's quarterly refunding, the first under Treasury Secretary Scott Bessent, should garner attention in the wake of a persistent rise in long-term Treasury yields, which partly reflects concerns that the shortfall in federal revenue versus expenditures will require ever more issuance of government debt to cover it.

Since the launch of the Federal Reserve's easing cycle in mid-September, the benchmark 10-year yield US10YT=RR has climbed roughly 90 basis points. The yield was last at 4.52%.

J.P. Morgan estimated that the U.S. fiscal deficit will climb to $1.895 trillion or 6.2% of gross domestic product $(GDP)$ this year, increasing to $2.2 trillion next year or 7.1% of GDP. In 2017 when Trump first took office, that deficit was 3.1% of GDP.

"Widening budget deficits suggest that Treasury will need to boost coupon auctions later this year or in early 2026," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte.

The majority of bank forecasts expect the Treasury to increase the auction sizes for notes and bonds at the November refunding when an escalating fiscal deficit and declining borrowing capacity result in a large funding gap in 2026.

The Treasury will release its quarterly borrowing requirements on Monday at 3:00 p.m. ET (2000 GMT) and its refunding plan on Wednesday at 8:30 a.m. ET (1330 GMT).

Analysts said they expect the Treasury to announce $125 billion of refunding auctions of the three-year, 10-year, and 30-year maturities scheduled for the following week, unchanged from the last refunding announcement.

Market participants also anticipate modest increases in the auction sizes of Treasury Inflation-Protected Securities $(TIPS)$, a move aimed at raising the TIPS share of the Treasury market. Primary dealers in October recommended to the Treasury to increase TIPS sizes because the market could absorb additional supply.

"The key takeaway for the Treasury market is that supply will remain elevated for the foreseeable future as rising deficits and maturities of existing debt push up borrowing needs," Griffiths said.

BORROWING ESTIMATES, DEBT COMPOSITION

The spotlight will also be on Monday's announcement of borrowing estimates for the first and second quarters, when the government will also report how much it borrowed last quarter. In their last borrowing forecast announced in late October, the Treasury said it planned to borrow $546 billion in the fourth quarter and $823 billion in the first quarter of 2025, assuming an end-of-March cash balance of $850 billion.

The debt ceiling, which had been suspended since June 2023, was reinstated on Jan. 2 at $36.1 trillion, adding a minor twist to the Treasury's short-term borrowing plans, although it's not a major concern for investors. Analysts said there are certain measures available to free up cash in case of a prolonged debt impasse.

"Perhaps this episode will not be filled with drama — we put well over a 50% probability on the debt ceiling being suspended by June," said Angelo Manolatos, macro strategist at Wells Fargo in Charlotte.

"Our economics team expects the debt ceiling resolution to be paired with the March fiscal year 2025 budget bill."

Market participants will also try to gauge the new administration's approach to the overall debt composition under Bessent, who has advocated terming out, or lengthening, debt maturities.

Bessent has been critical of former Treasury chief Janet Yellen, writing in the Wall Street Journal after President Donald Trump's election, that she "distorted Treasury markets by borrowing more than $1 trillion in more-expensive shorter-term debt compared with historical norms." At the moment, short-term bills represent 22% of Treasury debt, higher than the 15%-20% recommended by the Treasury Borrowing Advisory Committee (TBAC).

Goldman Sachs, in a research note, however, said it does not expect a rapid shift to longer-term debt issuance, but rather sees "a medium-term effort to achieve a roughly 20% bill share." The U.S. bank cited the increase in term premium, or the added compensation investors demand for holding long-term bonds.

The current term premium is 71 basis points (bps), according to St. Louis Fed estimates, up from 45 bps in early December.

A broader curve steepening, showing higher yields on longer-dated maturities, also "means that a rapid terming out would not lower current interest expense," Goldman wrote.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Alden Bentley and Andrea Ricci)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))