Treasury refunding preview: Steady coupon supply
Summary
We do not expect any major surprises from the US Treasury at next Wednesday's Treasury refunding announcement. We expect Treasury to continue to signal that coupon auction sizes will remain unchanged for "at least the next several quarters."
That said, at the last refunding, Treasury cracked open the door to eventual auction size increases. Our baseline expectation is that the "next several quarters" language will be dropped at the May refunding, clearing the way for the start of coupon auction increases a few quarters later in February 2027.
Our forecast for a roughly flat budget deficit in FY 2026 underpins this status quo position for Treasury. The biggest risk to our deficit forecast is the outlook for tariff revenues. If the Supreme Court strikes down President Trump's authority to implement tariffs via IEEPA, this would threaten roughly $175 billion of tariff revenue we have baked into our forecast for the year in addition to any retroactive refunds the Supreme Court could order, which we estimate would be $130 billion or so.
Thus, there is a risk that we could increase our FY 2026 federal budget deficit forecast by $300 billion or so if the IEEPA tariffs are struck down by the Supreme Court. If realized, this would translate one-to-one into more net T-bill issuance.
We project total T-bills outstanding to rise by $544 billion in 2026, a meaningful sum that accounts for 27% of our projected net Treasury issuance for the year. But, after accounting for an anticipated $557 billion of Fed buying for the year, privately-held net T-bill supply will be more or less flat.
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 and the federal funds rate, will be the dominant influences on 10-year Treasury yields this year, in our view. We continue to look for a roughly unchanged 10-year Treasury yield this year (YE 2026 forecast of 4.25%) amid a terminal fed funds rate of 3.00%-3.25%.
Author
Wells Fargo Research Team
Wells Fargo
