I wouldn’t describe it as “consensus,” or not yet anyway, but calls for Scott Bessent to consider reducing coupon supply are becoming more commonplace.

The rationale’s simple. The buyer base for US Treasurys is shifting in favor of price-sensitive investors, which is to say investors who care about the fiscal “fundamentals.” Those fundamentals aren’t great in America, and while that didn’t used to matter, it does now. And not just because the composition of the investor base is changing.

When you start making noise, as the Trump administration is, about killing every sacred cow who wanders into your gunsights, you’re going to rattle some nerves, where that means people are going to start asking questions about your commitment to the various and sundry arrangements which underpin America’s so-called “exorbitant privilege.”

In the simplest terms: “They’re Treasurys” isn’t good enough anymore when it comes to explaining why everyone should buy America’s debt. Or at least not good enough on its own.

The market’s starting to build in more term premium to account for the multiplying risks associated with bonds which weren’t supposed to have any — any risk, I mean. With the distortive dynamics behind the phenomenon that was (past tense) a negative term premium now fading or gone, prices are prices again. If the US wants investors to lock up their money for a decade or longer as opposed to just rolling short-dated obligations, compensation’s required.

At 76bps, the term premium’s off the post-“Liberation Day” wides, but as the figure above shows (and as discussed here last week), we’re a long way from the pre-Lehman average. In other words: The term premium could rise a lot more.

There are a couple of ways to go about addressing this situation. One of them’s for Trump to stop behaving erratically and act like a “normal” US president. I think we can all agree, regardless of political persuasion, that isn’t going to happen.

Another way is for Congress to sit down and work towards some manner of bipartisan plan to address the fiscal trajectory in a way that pacifies the bond market. That isn’t going to happen either. Right now, as we speak, Republicans are in the process of trying to ram a hyper-partisan spending bill through Congress that’s expected to balloon the deficit by trillions.

The third way for Bessent to address stress at the long-end of the Treasury curve is to change the supply-demand reality.

Trump’s Trump (i.e., insufferable on urbane days) and the GOP’s the GOP (i.e., a hopeless personality cult), but Treasurys are still Treasurys. To say they’re losing their luster relative to other DM govies is apples to oranges for any number of reasons, not least of which is that all those markets combined aren’t large enough, nor deep enough, to stand in for the US bond market.

Unless Trump does something totally outlandish — e.g., make the Democratic party illegal or send troops to The New York Times — there will be adequate sponsorship for the US long-end, it’s just a matter of price. One way to get that price higher — i.e., yields lower — is to reduce the supply on offer. And that’s just what Bessent may have to do.

In a mid-year outlook piece published late last week, Morgan Stanley laid out “a potential strategy” Treasury could pursue starting in February of 2026 that’d reduce coupon sizes with the effect of shortening WAM by 2.4 months over two years (versus a baseline), as illustrated on the left below.

The figure on the right shows you the trajectory if coupons are kept constant (i.e., the baseline).

Of course, that’d mean more bills — you gotta fund the deficit somehow. Under Morgan Stanley’s strategy, total bills outstanding would rise by $1.5 trillion in 2026 and another $1.85 trillion in 2027.

The bank was quick to note that adopting this approach would merely keep the bill trajectory the same as it was (figure on the left, below), but that’d ultimately mean that as a share of total marketable debt outstanding, bills would hit 30% by 2027 (figure on the right).

Why does that matter? Well, because 30%’s above the TBAC-recommended range (in fact, it’s double the low-end of that range). Whether that’s something to fret over’s debatable. And 30% would be short of the GFC-era highs.

Would there be demand for those “extra” bills? Some of them, yes.

If Bessent were to “under-issue” coupons and money market funds’ allocation to bills remained constant, MMFs “would have capacity to absorb a bit above $300 billion in bills, just from projected industry growth over the next two years,” Morgan Stanley went on.

$300 billion isn’t near a big enough sponge, though. In the same note, Morgan Stanley noted that if the Fed were to shift half its coupon redemption reinvestments to bills starting early next year, that’d be good for another $450 billion in demand through 2027.

That still leaves a lot to be absorbed. Morgan Stanley found another $1.4 trillion in bill demand from stablecoins, but that assumes stablecoin market cap growth is 200% going forward. That’s not as crazy as it sounds, but it isn’t an assumption I’d bet my life on.

Adding all that up — the $300 billion from MMFs, $450 billion from the SOMA roll shift and demand from an exponentially-expanding stablecoin universe — you get $2.15 trillion, or about two thirds of the $3.3 trillion in incremental net bill issuance that’d result if Bessent adopted Morgan Stanley’s strategy for reducing coupon sizes.

If you ask me, it’d be easier if the Trump administration simply took steps to shore up confidence in America, where that means reiterating the country’s commitment to NATO as well as the rule of law at home, and just generally treating other nations and foreign investors with a modicum of respect. That’d go a very long way towards restoring faith in the long-end.