Treasury’s 20-Year Bond Opens a Chasm in Supply Outlooks

(Bloomberg) -- Taken by surprise by the U.S. Treasury’s plan to resume selling 20-year bonds, Wall Street dealers now have to guess how much of the debt to expect and the implications for existing maturities.

Figuring out how the new 20-year year will fit into the current framework is no mean feat, and getting it right is important -- the department’s decision on the matter could roil valuations across all maturities.

“Supply matters because it changes the shape of the curve,” said Bryce Doty, head of the taxable bond group at Sit Investment Associates Inc. in Minneapolis. “That uncertainty is going to add volatility.”

Complicating the calculation for dealers are questions over whether the new bonds will debut in February or May, and whether Treasury will decide to also introduce other securities this year, such as floating-rate debt linked to the Secured Overnight Financing Rate, or SOFR.

Most dealers predict that the 20-year auction cycle will consist of $13 billion quarterly new issues, with each followed by two $11 billion reopenings, for a total of $140 billion a year. That’s the amount the Treasury Borrowing Advisory Committee recommended in October. But there are significant outliers.

At the low end, JPMorgan Chase & Co. says 20-year auctions will start smaller -- $11 billion new issues and $9 billion reopenings -- before growing to TBAC’s recommended sizes in 2021, “given that the auction calendar is adequate to meet current funding needs,” strategist Jay Barry said in a note. That would mean an initial slate of $116 billion per year. Goldman Sach Group Inc. says 20-year supply could start as small as $8 billion to $10 billion a month.

“If our forecast is realized, I could see this acting to actually richen 20s vs the curve,” although the impact on the curve overall would be negligible, JPMorgan’s Barry said in an email.

At the high end, Morgan Stanley says 20-year issues need to be in the $16 billion to $20 billion a month range, for an annual total of $192 billion. The firm’s view is that size is needed to conform with the amount of duration Treasury sells at each other point on the curve. Strategists led by Matthew Hornbach forecast an $18 billion new issue followed by $15 billion reopenings.

At Odds

Dealers also are at odds over whether the Treasury is likely to adjust the sizes of its existing note and bond auctions to avoid raising more money than it needs.

A plurality including Morgan Stanley, Citigroup Inc., Toronto-Dominion Bank and Barclays Plc says Treasury shouldn’t make cuts now because it’s almost certain to need bigger auction sizes in 2021 when it will have larger quantities of maturing debt to roll over.

But JPMorgan projects cuts of $3 billion to each monthly 10-and 30-year auction beginning in May, and $1 billion reductions to the other nominal coupon auctions. Wrightson ICAP -- expecting 20-year issuance to total $180 billion a year -- looks for cuts of $2 billion a month each of the other fixed-rate nominal coupon auctions. And BMO Capital Markets says the 10- and 30-year monthly auctions could each be shrunk by $5 billion “to smooth the rollout” for the 20-year, strategist Jon Hill said in a note.

“The curve impact will be determined by a combination of the new issue size and where Treasury adjusts supply of existing points on the curve,” Goldman Sachs strategists led by Praveen Korapaty said in a Jan. 17 note.

In Goldman’s view, the likeliest outcome is broader curve steepening as a result of shorter maturities being trimmed.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Jenny Paris

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