BNP Paribas Warns Cutting 20-Year Treasury Could Raise Yields

Treasury Secretary Scott Bessent is facing pressure to discontinue the issuance of the 20-year Treasury bond, but BNP Paribas SA has cautioned that such a move could push borrowing costs higher rather than lower. The French bank’s strategists stress that eliminating this bond maturity could backfire, causing unintended market disruptions.

Market participants have observed that yields on long-term US government debt are trading near levels not seen in decades. This has sparked speculation that the Treasury might shift its borrowing strategy to favor shorter-term debt over longer maturities. The 20-year bond, introduced in 2020, currently offers a higher yield than the 10- and 30-year notes, which is unusual given that longer maturities typically carry greater risk.

Guneet Dhingra, who leads BNP Paribas’s US rates strategy, along with colleagues Sebastian Mauleon and Vincent Zhou, shared their analysis in a client note. They argue that cutting the 20-year bond would not sustainably lower yields. Instead, it could signal panic within the Treasury Department and suggest that the government’s borrowing options are running thin. This perception might embolden bond vigilantes, investors who sell debt aggressively in response to perceived fiscal mismanagement.

The BNP team currently recommends shorting 30-year Treasuries, expecting their yields to climb from 5.64% to around 5.8%. This position reflects their forecast that long-term borrowing costs will continue to rise despite recent interventions.

The debate over the 20-year bond highlights an unusual degree of uncertainty in US debt management, traditionally considered predictable and steady. The upcoming quarterly refunding announcement on November 4 will be closely watched, as it will outline the Treasury’s plans for new debt issuance. This will be the first update since Treasury officials revised their buyback program for long-dated securities. The program, dubbed the "Treasury twist" by Bessent, initially eased pressure on long-term bonds, but yields soon resumed climbing, reaching a 24-year high.

At the last refunding statement, the Treasury subtly changed its language, indicating it was considering possible "changes" to coupon and floating-rate note sales rather than explicitly stating there would be "increases." This shift leaves open the potential for reducing supply in some areas, though fully discontinuing the 20-year bond remains a low-probability scenario.

Since its reintroduction, the 20-year Treasury has struggled with demand. This has fueled ongoing discussions about whether the Treasury should scrap it altogether, especially since the government currently pays more to borrow at 20 years than at 30 years, defying typical yield curve expectations. On Tuesday, the 20-year bond yielded 5.68%, slightly below Monday’s peak of 5.75%, which marked its highest level since being brought back.

Historically, the Treasury stopped issuing 30-year bonds in 2001, but that occurred under very different fiscal conditions when budget surpluses reduced borrowing needs. Removing a key maturity now would require other maturities to absorb additional debt issuance during a time when overall borrowing remains high.

BNP Paribas analysts point out that the Treasury’s expanded buyback program has not halted rising yields, indicating that supply adjustments alone have limited effect on long-term rates. They note that cutting back on long-term issuance might force the Treasury to increase sales of short-term bills, which is costly in a rising interest rate environment driven by Federal Reserve policy.

"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," the strategists wrote. They warned that repeated unsuccessful attempts to control yields through adjustments in issuance could encourage more aggressive selling from bond market participants.

This situation underscores the challenges facing US debt managers in balancing borrowing needs, market demand, and fiscal policy amidst a backdrop of persistent inflationary pressures and elevated deficits. Investors and policymakers alike will watch closely for signals from the upcoming refunding statement and future Treasury actions.