The U.S. deficit rate in 2026 may approach 6.2%, with a financing gap of $5.5 trillion over the next five years, is a wave of medium and short-term bond issuance approaching?

According to the global market strategy report released by JP Morgan on November 17, the U.S. federal budget deficit is expected to further deteriorate to $1.955 trillion in the fiscal year 2026, accounting for approximately 6.2% of GDP. More critically, due to a surge in debt maturities, the U.S. Treasury will face a financing gap of up to $5.5 trillion between the fiscal years 2026 and 2030.

In the face of this fiscal pressure, JP Morgan strategists predict that the Treasury's current note issuance strategy will be difficult to sustain, forcing it to adjust its debt management model.

According to the Chasing Wind Trading Desk, the report indicates that while the current schedule for coupon-bearing Treasury auctions can still meet the demand for the fiscal year 2026, the financing gap will significantly widen starting from the fiscal year 2027. JP Morgan expects the U.S. Treasury to initiate a series of issuance scale increase plans starting in November 2026, lasting several quarters.

It is noteworthy that the focus of the new issuances will be concentrated on the front and middle ends of the yield curve, while the auction sizes for 20-year and 30-year Treasury bonds are expected to remain unchanged to address the structural weakness in long-end demand.

In terms of short-term liquidity, JP Morgan predicts that the U.S. will net issue $770 billion in Treasury bills in 2026. Meanwhile, the Federal Reserve's operations in the secondary market will become a key variable. With the Fed's quantitative tightening expected to end on December 1, 2025, the bank plans to purchase approximately $282 billion in Treasury bills through the secondary market and reinvest the principal payments from mortgage-backed securities into Treasury bonds. Although this measure alleviates the absorption pressure on the private sector in the short term, it does not change the trend of long-term debt structure deterioration.

Despite the "Basel Treasury" continuing a more traditional debt management strategy and attempting to lower long-term yields through forward guidance, the market's absorption capacity is approaching a critical point. JP Morgan warns that if the Treasury relies solely on short-term Treasury bills to fill the funding gap in the coming years, by the end of 2028, the proportion of Treasury bills in outstanding debt will rise to 28%, significantly increasing the Treasury's refinancing risk and market volatility.

Widening Deficit and $5.5 Trillion Financing Gap

According to the analysis by JP Morgan strategists Jay Barry, Phoebe White, and others, although the U.S. federal budget deficit is expected to slightly narrow to $1.775 trillion in the fiscal year 2025, this is largely masked by accounting adjustments related to student loan programs. Excluding the relevant cost adjustments, the actual financing demand has been deteriorating.

Looking ahead to the fiscal year 2026, the deficit is expected to rise to $1.955 trillion, accounting for 6.2% of GDP. More critically, based on current forecasts, the U.S. Treasury will face a total financing gap of $5.5 trillion between the fiscal years 2026 and 2030, primarily driven by large-scale debt maturities The report also specifically mentions the uncertainty of tariff revenue. JP Morgan assumes that tariff revenue will be approximately $350 billion next year in its baseline scenario. However, this forecast faces downside risks; if the Supreme Court rules that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are invalid before the end of the year, the administration may be forced to invoke other provisions (such as Section 122) to temporarily implement a 15% comprehensive tariff, which could then be made permanent through means such as a Section 301 investigation. Although this means that tariff revenue may not decline significantly, the legal complexities of the related refund processes could result in actual net revenue being lower than expected.

November 2026 May Become a Turning Point for Debt Issuance Strategy

In light of future funding gaps, JP Morgan believes that the U.S. Treasury cannot rely solely on short-term Treasury bills in the long term. At the refinancing meeting in November, the Treasury Borrowing Advisory Committee (TBAC) clearly pointed out that while the recent increase in Treasury bill issuance has reduced expected costs, it has also raised volatility. TBAC Chairman Dunn and Vice Chairman Mittal stated in a letter to the Treasury that current forecasts support increasing the issuance of coupon-bearing Treasury bonds in fiscal year 2027.

Accordingly, JP Morgan expects the Treasury to initiate a new round of coupon-bearing Treasury bond issuance in November 2026. Unlike previous rounds, this issuance will show structural differentiation:

• Focus on the Short to Medium Term: The increase will be concentrated in short to medium-term bonds.

• Long End Frozen: The auction sizes for 20-year and 30-year bonds will remain unchanged.

This strategic adjustment aligns with the conclusions of the TBAC model, which suggests that in an unfavorable macroeconomic scenario, shifting the issuance focus from Treasury bills to shorter-term coupon bonds can reduce volatility without significantly increasing costs. It also reflects a structural weakening in market demand for long-duration assets.

The Federal Reserve's Return to the Market and the Limitations of Treasury Bills

In the debt supply landscape of 2026, the role of the Federal Reserve will change. The report predicts that the Federal Reserve will end quantitative tightening on December 1, 2025, four months earlier than previously expected.

• Reinvestment Strategy: The Federal Reserve plans to reinvest all principal payments from MBS into Treasury bills through the secondary market.

• Reserve Management Purchases: Starting in January 2026, the Federal Reserve is expected to conduct approximately $8 billion per month in reserve management purchases to offset the growth of circulating currency.

Taking all operations into account, JP Morgan expects the Federal Reserve to purchase $282 billion in Treasury bills in the secondary market next year. After deducting the Federal Reserve's purchases, the net increase in Treasury bills held by the private sector is expected to be $488 billion.

However, the risk of over-reliance on Treasury bills still exists. If the Treasury relies entirely on issuing Treasury bills to address future financing gaps, by the end of 2028, the proportion of Treasury bills could reach 28%, far exceeding historical normal levels. This not only contradicts the principles of prudent debt management but also limits the Treasury's ability to respond to future unexpected shocks

Treasury Inflation-Protected Securities (TIPS) and Repurchase Operations

In terms of specific varieties, JP Morgan noted that the Treasury has not continued to increase the issuance scale of Treasury Inflation-Protected Securities. The new issuance scale of 10-year TIPS in January remained at $21 billion, breaking the trend of steady increases over the past two years.

The report estimates that by the end of next year, the proportion of TIPS in outstanding debt may drop to 6.6%, below the optimal range of 7-9% previously suggested by TBAC. This means that the Treasury may need to reassess the issuance proportion of TIPS at a future refinancing meeting.

In addition, the Treasury's repurchase plan is expected to maintain its current scale, with liquidity support purchases of up to $38 billion per quarter and cash management repurchases of up to $150 billion per year. Although some operations may not be fully executed, the repurchase plan is expected to increase financing demand by approximately $240 billion next year