Treasury refunding preview: Steady as she goes
Summary
We do not expect any major policy shifts at the upcoming quarterly refunding announcement from the U.S. Treasury. We remain of the view that current gross coupon auction sizes will remain unchanged until early 2027.
We look for Treasury to project net marketable borrowing of $697 billion in the current quarter and $795 billion in Q1-2026. More medium term, our forecasts for the federal budget deficit are $2.00 trillion for FY 2026, $2.10 trillion for FY 2027 and $2.25 trillion for FY 2028. We feel the risks are skewed toward wider budget deficits given the possibility that the Supreme Court could strike down the Trump administration's use of IEEPA to impose reciprocal tariffs.
The Federal Reserve announced the end of balance sheet runoff yesterday. Runoff of mortgage-backed securities will continue, with the proceeds reinvested back into Treasury bills starting December 1. We estimate that these purchases will average roughly $16 billion per month and continue indefinitely.
The more difficult question to answer is when reserve management purchases will begin. Our base case is that these reserve management purchases will begin in April and average approximately $25 billion per month, with purchases concentrated entirely in T-bills.
Looking to 2026, we project T-bills outstanding to grow by $648 billion, roughly a 10% increase from 2025. However, the Federal Reserve's T-bill purchases will help absorb this supply growth. We forecast $459 billion in T-bill purchases by the central bank in 2026. Thus, even as the T-bill share of the Treasury market climbs to 23% in 2027, the Fed's purchases help keep the share held by private investors near 20%.
We are skeptical that Treasury supply will be the key determinant of the level of Treasury yields in 2026. Other factors, such as the outlook for economic growth, inflation, the composition of the FOMC and the path for the federal funds rate will be the dominant influences on 10-year Treasury yields next year, in our view. We continue to look for a modestly higher 10-year yield next year amid an above-consensus 2026 economic growth forecast and a terminal fed funds rate of 3.00%-3.25%.
Author
Wells Fargo Research Team
Wells Fargo
