Investors are playing close attention to this week's quarterly refunding announcement as a sharp jump in long-term Treasury yields has been partly attributed to concerns about the U.S. fiscal deficit. Since the end of July, the 10-year yield has climbed more than 100 basis points.

"The market has associated the rise in Treasury yields with deficit concerns and reflects worries about the sustainability of those deficits," said Guneet Dhingra, managing director and head of U.S. rates strategy at Morgan Stanley in New York.

The budget deficit is increasing due to several factors, including higher federal government borrowing costs arising from the Federal Reserve's interest rate increases and quantitative tightening.

Analysts at TD Securities expect the deficit to expand to $1.85 trillion in 2024 from $1.69 trillion this year and projects another $677 billion of bills that mature in a year or less coming to market and about $1.7 trillion in notes and bonds. So far this year, the Treasury has issued about $1.6 trillion of additional bills and roughly $1.04 trillion in longer-term debt.

The spotlight will also be on Monday's announcement of borrowing estimates for the fourth quarter and the first quarter of 2024. It was the announcement on July 31 of $1.007 trillion in funding needs for the third quarter that spooked the bond market, leading to the sharp increase in auction volumes.

The Treasury will release its quarterly borrowing requirements on Monday at 3 p.m. ET (1900 GMT) and its refunding news on Wednesday at 8:30 a.m. ET (1230 GMT).

The Treasury is also likely to announce a buyback program for a possible launch in January, aimed at improving bond market liquidity, analysts said. The last time it conducted a regular buyback program was in the early 2000s, and it ended in April 2002.

SKEWING SHORT-END

The latest refunding could see the Treasury skew issuance to the shorter-term bills, while the increase at the long end could shrink due to concerns about the impact of additional supply on long-term yields, analysts said.

That would be a divergence from the August refunding when the Treasury aggressively raised the auction sizes for notes and bonds, which have longer maturities, after largely relying on the sale of short-term bills to raise its cash holdings and finance its growing deficit amid the debt ceiling suspension in June.

Morgan Stanley's Dhingra, who expects the Treasury to rely on T-bills to finance its budget needs, said such a move could push the percentage of T-bills as a share of outstanding U.S. debt to around 22%. That is slightly higher than the 15% to 20% range adopted by the Treasury.

Tom Simons, U.S. economist at Jefferies in New York, said the current market environment should support a more elevated T-bill percentage for some time because of a still-healthy appetite for shorter-term investments.

The projected increase in longer-term deficits in the coming years, however, will keep Treasury raising auction sizes, analysts said.

"But the government doesn't want to lean too heavily on the longer end of the curve to finance the deficit," said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina, adding that there was a need for a "balance-of-risk approach.