A little over a year ago, post-Election Day, the narrative in the bond market centered around the potential for swelling U.S. budget deficits and rising Treasury securities supply. In fact, the term ‘bond vigilantes’ was brought back to describe what could possibly be awaiting investors in the fixed income arena. Well, here we are with less than a month before we ring-in 2026, and there’s no signs of any ‘vigilantes’…yet, anyway.
As we’ve discussed before, budget deficits and attendant supply concerns for the UST market are typically not a primary driver for rates, let’s say in this case the ten-year Treasury yield. Indeed, macro factors, such as economic growth & inflation along with monetary policy considerations, are what matter the most. Federal fiscal concerns tend to be more secondary or tertiary in nature, but they can add to or take away from an existing trend in open market yields.
That brings us to the current fiscal situation of the U.S. government. Once again, the red ink total for FY 2025 came in just under $2.0 trillion at $1.8 trillion, or basically the same as the prior fiscal year. Unfortunately for the deficit hawks out there, this is essentially the baseline deficit for the US as we move into FY 2026 and beyond.
So, what does the future have in store for the Supply of Treasuries and should investors have it on their radar? Every year, the nation’s debt managers provide a quarterly update on financing needs, occurring each February, May, August and November. It is known as the Treasury Refunding announcement.
While fluctuations and financing needs do vary from month-to-month, Treasury usually utilizes T-bills as its work horse. It is easier to adjust T-bill auction sizes for the market rather than their fixed and floating coupon offerings. To be sure, the money and bond markets are quite used to changing bill auction amounts. However, coupon auction sizes are another ballgame, with a more ‘constant’ approach definitely being preferred for these types of securities.
One of the more recent times the nation’s debt managers implemented increases in coupon auction sizes was back in August/November 2023. At those respective refunding announcements, Treasury stated that not only did it intend to gradually raise these auction amounts, but it also provided guidance that “further gradual increases will likely be necessary in future quarters.” When you combine this factor with the macro scenario at that time, the UST 10-year yield actually eclipsed the 5% threshold and came in at a high of 5.02% in intra-day trading.
Fast-forward to where we are now. Yes, the federal government is still running close to $2 trillion deficits, but the fiscal situation has not deteriorated any further, or at least to the point where increases in coupon auction sizes are needed. In fact, at the November 2025 refunding announcement, the debt managers stated that “Treasury anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.”
Unless Treasury provides an unexpected increase in coupon auction sizes at the February refunding announcement, this issue should not rear its ugly ahead until possibly May. In other words, the ‘bond vigilantes’ should be kept ‘at bay’ for a few months more, at a minimum.
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