Treasury to Boost Auction Sizes by $10 Billion Starting May Refunding, Dealers Told

Treasury Planning Larger Auctions

The Treasury Department will increase the size of its quarterly refunding auctions by $10 billion across the yield curve beginning with the May 2026 refunding, according to two senior officials at primary dealers briefed on the plan Thursday. The change, which will raise borrowing estimates for the current fiscal year to roughly $2.1 trillion, is scheduled to be announced on Feb. 9 after markets close, the officials said.

Officials from the Treasury's Office of Debt Management told representatives of primary dealer firms during a 3 p.m. briefing on Feb. 5 that auction sizes for the 3-year note, 10-year note, and 30-year bond would each rise by $10 billion per sale, the dealer officials said. The briefing took place in Room 1425 of the Treasury Building and included materials distributed under embargo until the formal announcement, according to one official who attended.

The decision reflects a revised borrowing outlook driven by higher outlays and lower than expected tax receipts through the first four months of fiscal 2026, the officials said. The Treasury Borrowing Advisory Committee, which met Jan. 28 and Jan. 29 at the Federal Reserve Bank of New York, recommended that the department increase nominal coupon issuance rather than rely more heavily on bills, two officials familiar with the committee's deliberations said.

A trader at a primary dealer said the market had positioned for a modest increase in issuance but that the $10 billion per auction figure exceeded consensus expectations. The yield on the 10-year Treasury note, which closed at 4.48 percent on Feb. 5, could face upward pressure when the announcement is made, the trader said. Longer-dated securities, including the 30-year bond, are likely to see the steepest relative cheapening, the trader added.

The increase will apply to the 3-year note auction scheduled for May 12, 2026, the 10-year note auction set for May 13, 2026, and the 30-year bond auction planned for May 14, 2026, the officials said. Those auctions are part of the quarterly refunding that refinances approximately $80 billion in maturing securities. The Treasury also plans to boost issuance of 2-year notes by $5 billion per auction and 7-year notes by $5 billion per auction starting in June, one dealer official said.

Fed Balance Sheet Implications

The larger auction calendar complicates the Federal Reserve's ongoing management of its balance sheet, according to an economist at a Wall Street firm who has advised institutional clients on Treasury market structure. The Fed is currently allowing up to $25 billion in Treasury securities to roll off its balance sheet each month, plus $35 billion in mortgage-backed securities, under the quantitative tightening program that began in 2022.

The economist said that if the Treasury increases coupon supply at a time when the Fed is not actively buying, private investors will need to absorb a larger share of issuance. The 10-year Treasury yield has already risen 42 basis points since the start of 2026, and further increases could tighten financial conditions beyond what the Federal Open Market Committee intended, the economist said.

Two Fed officials familiar with internal discussions said the Treasury's borrowing plans are expected to factor into the FOMC's deliberations at its March 17-18 meeting. One official said staff at the Federal Reserve Bank of New York have begun modeling scenarios in which higher term premiums push long-term yields above 4.75 percent by the end of the second quarter. The Fed's Treasury holdings stood at $4.3 trillion as of Jan. 28, down from a peak of $5.8 trillion in 2022, according to Fed data.

The Treasury's decision to front-load the increase in coupon issuance rather than bills suggests a preference for locking in borrowing costs before expected rate volatility, the economist said. The department also wants to avoid a repeat of the 2023 episode in which bill issuance surged and drained liquidity from the banking system, the economist added.

Market and Political Reactions

Bond market participants said the announcement, if confirmed, would mark the most significant increase in quarterly refunding sizes since 2023. A portfolio manager at a major asset manager, who was not authorized to speak publicly, said the firm's rates desk had reduced duration exposure in anticipation of the Feb. 9 announcement. The manager said the 10-year yield could test 4.65 percent by the end of the following week.

Congressional aides said the borrowing increase is likely to intensify debate over the federal budget. Three congressional aides briefed on the fiscal 2026 outlook said the Congressional Budget Office is preparing to revise its deficit projection upward by approximately $200 billion, with a report expected in late February. The aides said the higher borrowing needs reflect both mandatory spending growth and revenue weakness tied to capital gains realizations in 2025.

The Treasury's announcement is scheduled for 3 p.m. Eastern on Feb. 9, following the conclusion of the quarterly refunding press conference. The Feb. 5 dealer briefing included a one-page table showing auction sizes through August 2026, the officials said. The table indicated that the department expects to maintain the larger sizes through at least the end of the fiscal year barring a significant change in the budget outlook.

Analysts said the timing of the increase could complicate the administration's legislative agenda. One congressional aide said lawmakers had been told to expect a budget request in early March that assumes higher borrowing costs than the fiscal plan released last year. The aide said the Treasury's move would make it harder for the White House to argue that deficit reduction can be achieved without cuts to major programs.

Watch for senior Treasury officials' public remarks on Feb. 7, when they are scheduled to appear at the Economic Club of New York, for any signal that the department views the higher issuance as temporary or structural. Also watch for the Federal Reserve's senior loan officer survey, due Feb. 10, which will show whether rising long-term yields have begun to constrain bank lending.