A potential rally in long-dated U.S. Treasuries is expected as the Treasury Department and Federal Reserve move toward a coordinated strategy to reduce the supply of longer-term debt, according to Citrini Research.
The research firm anticipates that a shift in government borrowing toward shorter-term instruments—dubbed the "Treasury twist" by Treasury Secretary Scott Bessent—will lower long-term yields and support outperformance in 30-year bonds relative to 5-year notes. Citrini recommends a trade betting on the narrowing of the yield spread between the two maturities over the next three months.
The proposed policy framework involves the Treasury increasing buybacks of long-term bonds while the Federal Reserve pares its balance sheet. Commercial banks are expected to expand their holdings, absorbing more Treasury bills as issuance skews away from longer maturities. Fed Chair Kevin Warsh has signaled support for a smaller balance sheet and has formed a task force to review its size and the maturity composition of its assets.
Bessent outlined the "Treasury twist" strategy last week, framing it as a means to reduce market pressure on long-term yields. The next major milestone is the Treasury’s refunding announcement on November 4, by which point Citrini expects the policy shift to become more visible to investors.
The firm’s outlook contrasts with its longer-term bearish stance on long-term bonds, citing concerns that nominal economic growth could remain above government borrowing costs. This dynamic, Citrini argues, may result in bondholders earning returns below inflation while lower yields encourage additional borrowing and fuel inflationary pressures.
Citrini’s near-term forecast follows a period in which 30-year yields reached their highest level in nearly two decades, underscoring the potential for a reversal if the proposed policy adjustments materialize.
