BNP Warns Scrapping 20-Year US Treasury Could Push Yields Higher

Treasury Secretary Scott Bessent should avoid eliminating the 20-year US Treasury bond, as doing so risks increasing borrowing costs rather than lowering them, BNP Paribas SA cautioned in a client note. The warning comes amid speculation that Bessent might shift issuance away from long-maturity debt toward shorter tenors, where yields remain near multi-decade highs. Strategists led by Guneet Dhingra, head of US rates strategy at BNP Paribas, argued that removing the 20-year bond would not sustainably reduce yields and could trigger unintended consequences, including higher yields and reduced market liquidity. They described such a move as potentially signaling panic and an exhausted policy toolkit, which might embolden bond vigilantes. The firm maintained its recommendation to short 30-year Treasuries, targeting a yield increase to 5.8% from the current 5.64%. The debate underscores growing uncertainty in US debt management ahead of the Treasury’s quarterly refunding statement on November 4, which will outline upcoming issuance plans. This will be the first such statement since the unexpected overhaul of the long-maturity buyback program, referred to by Bessent as the 'Treasury twist'. Although that initiative initially eased pressure on long-end bonds, yields have since resumed their climb, reaching a 24-year peak. At the prior refunding, the Treasury subtly shifted its language from expecting 'increases' to evaluating 'changes' in coupon and floating-rate note sales, leaving room for future supply reductions. However, outright elimination of the 20-year bond remains a tail risk. The 20-year maturity has faced challenges since its reintroduction in 2020, with borrowing costs at that tenor now exceeding those of the 30-year bond—an unusual inversion given the typically higher risk of longer maturities. On Tuesday, the 20-year yield traded at 5.68%, having touched 5.75% the previous day, its highest level since returning to the market. Historical context shows the Treasury last halted 30-year issuance in 2001 during a period of budget surpluses, a fiscal environment vastly different from today’s elevated financing needs. Eliminating a maturity now would shift the burden to other tenors amid high issuance volumes. BNP Paribas strategists noted that the limited success of expanded buybacks in curbing yield increases suggests supply-side adjustments have constrained impact. Reducing long-end issuance would likely require greater reliance on short-term bills, which could prove expensive amid ongoing Federal Reserve rate hikes. They concluded that without addressing core issues like inflation and deficits, Treasury interventions amount to temporary fixes, and repeated failures to lower yields may further encourage market skepticism.