Treasury Unveils First Cut in Long-Term Debt Sales Since ‘16
(Bloomberg) -- The U.S. Treasury announced the first reduction in its quarterly sale of longer-term debt in more than five years on Wednesday, reflecting diminishing borrowing needs as the wave of pandemic-relief spending ebbs.
The Treasury Department said in a statement that it will sell $120 billion of long-term securities at auctions next week. That’s down some $6 billion from the record levels seen over the past three so-called quarterly refundings.
Further scaling back will be done in regular auctions of all longer-term securities in coming months, with the sole exception of inflation-linked debt. The deepest cutbacks will be in 7- and 20-year Treasuries, which had seen bigger increases in issuance during the ramping up of debt sales to meet Covid-19 needs.
“Based on the latest fiscal outlook, current auction sizes are projected to provide excess borrowing capacity over the intermediate term,” the Treasury said in its statement. After “modest reductions” over the three months through January, “any additional issuance-size changes will be announced quarterly in subsequent refunding statements,” the department said.
Twenty-year bonds rallied initially in the wake of the larger cuts to that sector, with yields falling as much as 3 basis points. The 20-year yielded about 1.97% as of 11 a.m. in New York, little changed on the day.
The Treasury has been making its issuance plans based on the assumption that Congress raises or suspends the federal debt limit. Lawmakers last month boosted the ceiling by a limited amount, with the Treasury’s borrowing authority set to run out as soon as next month.
Next week’s quarterly refunding auctions break down as follows:
- $56 billion of three-year notes on Nov. 8, versus $58 billion in August
- $39 billion of 10-year notes on Nov. 9, compared to $41 billion last quarter
- $25 billion of 30-year bonds on Nov. 10, versus $27 billion in August
- The refunding will raise $44.1 billion in new cash
Wednesday’s announcements were in line with the expectations of Wall Street bond dealers. They had predicted the Treasury would whittle down auctions of regular coupon bearing debt -- which pays interest -- beginning this month. They did diverge on just how big the cuts would be for securities with 10 years or more to maturity.
The Treasury also announced that over coming months it will do the following:
- Reduce sales of 2-, 3-year and 5-year note auctions by $2 billion per month over the next three months
- Cut 7-year notes by $3 billion per month over the next three months
- Decrease both the new and reopened 20-year bond auction sizes by $4 billion, starting in November
- Reduce both the new and reopened 10-year note auction sizes by $2 billion, starting in November
- Reduce both the new and reopened 30-year bond auction sizes by $2 billion, starting in November
- Cut reopening sizes of floating rate note sales in November and December by $2 billion each, with the same reduction for the next new-issue two-year FRN in January
More reductions are likely at the February and May refundings, Wells Fargo & Co. strategists including Zachary Griffiths said in a note. “The composition of today’s cuts supports our view that more reductions are still to come in at least the first half of 2022,” they wrote.
On Monday, the Treasury increased its estimate of federal borrowing needs for the three months through December after it ran down its stockpile of cash more than it previously anticipated.
The coupon-bearing auction trimming should give Treasury room to bolster bill supply -- once it’s no longer constrained by the limits of its borrowing authority.
“Treasury anticipates that the supply of bills will generally decline from current levels until Congress acts again to increase or suspend the debt limit,” the department said.
The Treasury in its statement noted that Secretary Janet Yellen told congressional leaders last month the department is confident it will be able to meet obligations through Dec. 3. Asked about outside estimates that the Treasury might not run out of cash until February under current law, a Treasury official told reporters Wednesday that it’s monitoring private-sector views.
After asking bond dealers ahead of Wednesday’s announcement about the idea of making the 17-week bill issuance routine, the Treasury said it’s not adding that as a benchmark for now.
The Treasury Borrowing Advisory Committee -- a group comprising dealers, investors and other stakeholders -- has advised in the past that bills taking about a 15% to 20% range of the total debt pile is ideal. TBAC said in a statement Wednesday that recurring problems around the debt cap have proved “reckless and inappropriate.”
TBAC Reiterates Debt Cap Episodes ‘Reckless and Inappropriate’
As for Treasury Inflation-Protected Securities, which compensate for increases in consumer prices, those will be kept steady over coming months. Dealers had predicted that TIPS wouldn’t be cut back. The follow are some details on the TIPS auction plans:
- 10-year TIPS reopening in November of $14 billion
- 5-year TIPS reopening in December of $17 billion
- 10-year TIPS new issue in January of $16 billion
The Treasury said that the planned schedule through year-end will lead to TIPS auctions rising by a total of $17 billion in gross issuance for 2021 compared with 2020.
The department said that thanks to current issuance sizes likely providing more borrowing capacity than the Treasury needs, it’s decided against proceeding with a floating-rate note linked to the Secured Overnight Financing Rate -- the Federal Reserve’s preferred replacement rate to Libor.
Many primary dealers expressed to U.S. debt managers that “intermediation capacity has not kept pace with the growth of the Treasury market, pointing to balance sheet constraints and greater participation by non-dealer liquidity providers,” according to minutes of the TBAC’s most recent meeting. This information came in dealers’ response to a question from Treasury on the market’s structure as part of its regular pre-refunding survey.
Brian Smith, the Treasury’s deputy assistant secretary for federal finance, told reporters Wednesday that Treasury is collaborating with the interagency working group on Treasury-market surveillance to understand important changes in the market’s structure.
“We are still gathering input and thinking about the best way to enhance Treasury-market resilience,” he said.
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