The US Treasury removed “at least”, and the supply of long-term bonds welcomed an adjustment window! Are AI financing costs expected to reach an inflection point?

The Zhitong Finance App learned that the US Treasury will maintain refinancing issuance of 125 billion US dollars next week, adding 28 billion US dollars in net cash. The issuance scale is in line with the general expectations of bond market traders. The key change is to remove “at least” and maintain the auction scale for “the next few quarters”. After the disclosure of the US Treasury's latest quarterly refinancing statement, some analysts interpreted the adjustment window as the first half of 2027 based on this, but the Treasury has not yet set a date or announced a reduction in the issuance of long-term treasury bonds.

If the supply of 10-year, 20-year, and 30-year US bonds is reduced in the future, the pressure on the financial market to take on long-term US bonds and the pressure on AI infrastructure financing costs that have continued to rise recently may be reduced, which is conducive to significantly reducing term premiums and bond issuance financing and refinancing costs associated with enterprise AI infrastructure. The $70 billion liquidity buyback helps improve transactions, but it is not quantitative easing, nor does it reduce net borrowing.

US Treasury adjusts wording to open the door to changing the scale of treasury bond auctions

The US Treasury adjusted the wording regarding the size of future treasury auctions on Wednesday. Analysts expect this change will pave the way for expanding the issuance of short- and medium-term treasury bonds and possibly reducing the scale of longer-term treasury bond auctions.

Previously, the bond market experienced a sharp monthly sell-off, driving 10-year and 30-year US Treasury yields to their highest level since 2002.

The Ministry of Finance removed the word “at least” from the guidelines, stating that it is expected that the auction scale of floating interest rate treasury bonds and interest-bearing treasury bonds will remain unchanged for “the next few quarters.” Many analysts understand “a few quarters” as two quarters, which means the relevant adjustments are likely to occur in the first half of 2027.

The 20-year and 30-year treasury bond auctions are sometimes difficult to attract sufficient demand, so they are considered the most likely to scale down. The increase in the scale of interest-bearing treasury bonds may be mainly concentrated in the 2-7 year term range, or it may also involve 10-year treasury bonds.

In August of this year, the Ministry of Finance said it would continue to evaluate possible future adjustments to the auction scale of interest-bearing treasury bonds and variable interest rate treasury bonds, which sparked market speculation about reducing the auction scale in the future. This statement is different from the May quarterly refinancing announcement, which mentioned the possibility of expanding the scale of issuance.

However, not everyone expects a reduction in the scale of longer-term treasury bond issuance; if demand for financing grows faster than expected, it may be difficult for the Ministry of Finance to reduce the scale of auctions. Over the past decade, the outstanding balance of US Treasury bonds has more than doubled from $14 trillion to $33 trillion.

The Ministry of Finance also stated that it will evaluate possible future adjustments to the auction scale based on structural demand trends and the potential costs and risks of different distribution structures.

This will include the Treasury Department communicating with market participants to better understand the changing dynamics of US Treasury supply and demand; the government will work to raise capital at the lowest cost in the long run.

The Ministry of Finance said it will adjust the 7-year treasury bonds to a quarterly auction of new securities and renew them twice. The Ministry of Finance also anticipates that it will reduce the scale of short-term treasury bill auctions in December and expand the auction scale for short-term treasury bills of various periods in January based on seasonal financial outflows.

The Treasury Department expects to repurchase up to $70 billion of US Treasury bonds covering various maturities to support market liquidity, and continues to evaluate measures that may improve repurchase operations, such as adjusting the maximum purchase amount.

The Ministry of Finance said it will issue 125 billion US dollars of treasury bonds next week, including 58 billion US dollars of 3-year treasury bonds, 42 billion US dollars of 10-year treasury bonds, and 25 billion US dollars of 30-year treasury bonds.

AI financing may be reduced, and credit spreads still need to be supported by cash returns

For Meta and Alphabet, the yield on US dollar bond financing is roughly equal to the yield on treasury bonds for the corresponding period plus credit and liquidity spreads; if the decline in the benchmark is offset by widening interest spreads, overall financing costs may still rise, and existing fixed coupons will not automatically decrease. Meta euro financing also depends on the euro swap interest rate and the hedging cost in exchange for the US dollar.

Furthermore, for AI new cloud forces such as CoreWeave, which are much larger in debt than cloud computing giants, we can't just look at 10-year US bonds: the company's $2.6 billion loan accrues interest according to the term SOFR plus 550 basis points, and falling long-term bond yields will not directly reduce the interest on this loan. CDS is also affected by credit risk and hedging supply and demand, and the continued narrowing needs to be supported by improvements in delivery, utilization, and debt repayment cash flow. This statement provides new cloud forces such as Coreweave with the possibility of reducing the pressure on AI financing. It is not yet possible to confirm market financing cost concerns associated with the AI infrastructure frenzy and the end of the CDS credit storm.

European bank stocks rose 4.5% in the intraday market, and Bank of America shares rose before the market. To a greater extent, the Democratic Party swept the Senate and House elections and suppressed the market. Of course, it was also due to some kind of bullish logic layer due to the statement issued later. The common benefit can be described as an expectation that fiscal expansion will be restrained, which is expected to ease the pressure of financing and default; if financing conditions continue to improve, it will also help AI companies' forward cash flow valuation.