BNP Paribas Warns Against Ending 20-Year Treasury Issuance

BNP Paribas has cautioned that ending the issuance of U.S. 20-year Treasury bonds could backfire, potentially driving yields higher and worsening market liquidity. The bank's strategy team, led by Guneet Dhingra, argued that reducing or eliminating the 20-year bond would not effectively lower long-term yields and could instead signal panic from the Treasury.

The warning comes as speculation grows that the U.S. Treasury might shift its borrowing strategy to counter rising long-term borrowing costs. Some have suggested reducing or scrapping 20-year bond sales, which currently force the Treasury to pay higher yields than on nearby maturities. BNP Paribas suggested that ending the 20-year bond could embolden bond vigilantes, who might push yields even higher.

BNP Paribas maintained its bearish outlook on U.S. 30-year Treasuries, expecting the yield to rise from about 5.64% to 5.8%. The bank also noted that funding costs could increase if the Treasury cuts longer-dated issuance and shifts to selling more Treasury bills during a Federal Reserve tightening cycle. The Treasury is set to announce its quarterly borrowing plan on November 4.

The 20-year Treasury bond, reintroduced in 2020, has faced persistent calls for elimination due to weak demand. As of October 6, the 20-year yield traded at about 5.68%, after reaching as high as 5.75% the previous day. BNP Paribas emphasized that without addressing core issues like inflation and fiscal deficits, Treasury policy tools would be ineffective.