BNP Paribas argues that ending the 20-year bond would raise long yields rather than lower them. The question hangs over the refunding as the Treasury sells $22 billion of 30-year bonds today.
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One maturity on the Treasury curve has become an awkward outlier, and the question of what to do about it is turning into a debate about confidence in the market itself.
The 20-year Treasury bond yielded as much as 5.75% on , above the 30-year bond. A longer loan normally pays more than a shorter one. When a shorter maturity yields more, it usually means buyers are demanding a premium to hold it.
The argument
Strategists at BNP Paribas, one of the dealers that bids at Treasury auctions, have argued against eliminating the 20-year. Their case is that ending the bond could be read by investors as "panic," a sign that the government is retreating from parts of the market where demand is thin. On that view, the move would raise long-term yields rather than lower them. BNP has a 5.8% target for the 30-year yield.
The other side of the argument is simple arithmetic. If a maturity costs the government more than a longer one, issuing less of it should save money. The Treasury has not publicly proposed ending the 20-year, and its next quarterly refunding announcement, where changes to issuance are made, is on .
The tools already in use
The Treasury is already supporting the long end in other ways. It has said it will buy back at least $4 billion of long-dated securities per operation through the refunding. Buybacks retire older, less liquid bonds and replace them with more actively traded issues.
Where the curve sits
Long-term yields remain near the highest levels of the century. Ten-year yields peaked at 5.36% overnight, a 24-year high, and were around 5.33% early Thursday. The 30-year bond, at about 5.71%, is within reach of levels last seen in 2002. At the short end, two-year yields sat at 4.80%, a level consistent with traders expecting the Fed to hold in October.
Demand has shown up at recent sales, including Wednesday's 10-year reopening. In Japan, a 30-year government bond sale of about 599.6 billion yen drew demand above its 12-month average at an average yield of 4.109%, and Japanese 30-year yields fell about 4 basis points to 4.17%.
The pressure is coming from supply and inflation. Large technology companies are lining up tens of billions of dollars of borrowing for AI equipment, which competes with the government for the same long-term savings. Oil rose about 4% overnight.
Borrowing Costs Versus Market Confidence
One reading is that removing an expensive, illiquid maturity would trim borrowing costs and concentrate demand in more liquid bonds, which could help the long end function better.
Another reading follows BNP. Cutting the 20-year at a time of record-high long yields and Fed tightening would push more issuance into short-term bills or other maturities, and the signal could cost more than the saving.
Today's test
The Treasury sells $22 billion of reopened 30-year bonds at 1 p.m. Eastern on Thursday. The previous sale cleared at a high yield of 5.308%. A strong result, with low dealer participation, would suggest the long end can absorb supply near current levels. A weak one would add weight to the case for changing the issuance mix on , in whichever direction the Treasury chooses.