The Flood of Long-End Treasuries May Just Be Getting Started

A forecaster who was spot-on in predicting the U.S. ramp-up of longer-maturity debt reckons that trend will continue.

Morgan Stanley’s Guneet Dhingra was the only primary-dealer strategist surveyed by Bloomberg ahead of last week’s Treasury refunding announcement to correctly pick the size of increases for sales of 10-, 20- and 30-year debt.

With Dhingra’s peers predicting smaller increases, the size of the change took most of the market by surprise, even though the last announcement from Treasury officials in May also revealed bigger-than-expected sale sizes at the long end.

“My expectation would be that this strategy of focusing on the long end will continue unless the auction statistics are not to their liking,” said Dhingra, Morgan Stanley’s head of U.S. interest-rate strategy.

This week’s 10-year auction, at $38 billion, is $6 billion larger than the equivalent sale three months ago, while the 30-year offering is rising $4 billion over the previous quarter to $26 billion. The 20-year note sale for August -- which takes place next week -- is $5 billion larger, at $25 billion.

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Yet, while Dhingra’s estimates for the longest maturities were in line with these figures, and his predictions for the two-, three- and five-year notes to each increase by $2 billion a month were on the money, his forecast for the seven-year tenor was not. He had forecast that maturity to increase by $2 billion per month -- less than a number of peers who correctly tipped that it would rise at $3 billion.

His prediction now, according to a report published Friday, is that the Treasury will continue to increase the size of these shorter-tenor auctions at that pace through April 2021. And that leaves room for the government to boost sales at the longer end.

“Conditions are perfect for Treasury to target a lot more issuance in the back end of the curve,” said Dhingra, citing the good reception for recent auctions even as yields have declined to record lows.

Also, the Treasury’s exploration of a 50-year bond twice in four years reflects “a bias toward long-term debt issuance” that’s reflected in its approach, he said.

Honey Badger

It’s going to take some getting used to. Blake Gwinn, a strategist at NatWest Markets whose issuance projections were in the middle of the pack, said in a report on Friday that the long-end increases upended the government’s “regular and predictable” operating framework.

The Treasury Department, which in the past “has seemed to take a more steady and drawn out approach to rolling into longer-dated coupons,” suddenly appears “less like tortoise, more like honey badger.”

With the next refunding announcement slated for the day after November’s presidential election, political considerations may alter the issuance trajectory, Gwinn wrote.

“But if demand at auctions remains healthy and there aren’t any significant signs of indigestion at the long-end, it’s possible Treasury keeps the pedal to the metal until the market tells them to slow down.”

Treasuries on Tuesday were having one of their worst days in months led by the longest maturities, with 10- to 30-year yields rising more than six basis points.

©2020 Bloomberg L.P.

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