U.S. Seen Cutting Quarterly Debt Sale Once More, Ahead of Fed QT
U.S. Seen Cutting Quarterly Debt Sale Once More, Ahead of Fed QT
(Bloomberg) -- The U.S. Treasury will scale back its sale of longer-term debt for a third straight quarter this month to better align its issuance with government spending needs, according to most bond dealers.
While that would make for the longest stretch of cuts since 2014-2015, it may well be the final reduction for some time, given that the Federal Reserve is poised to shrink its holdings of U.S. Treasuries by hundreds of billions of dollars by year-end. That Fed balance-sheet contraction will force the Treasury Department to boost its issuance over time.
On Wednesday, the Treasury will announce plans for its so-called quarterly refunding of longer-term securities, when it typically also unveils any changes to its overall issuance strategy. Dealers will be keenly watching for how debt managers aim to cope with the Fed’s bond-portfolio runoff, set to be unveiled later that same day.
As for the quarterly refunding itself, next week’s auction total is widely expected among dealers to slip by $6 billion to $7 billion compared with the $110 billion sold in February. That would mark a slightly smaller downsizing than the $10 billion cut last time.
Debt management will be a juggling act for the Treasury in coming months not only because of the Fed’s so-called quantitative tightening, or QT, but also because of a boom in tax revenue that’s swelling the department’s cash balance and shrinking the fiscal deficit, for the moment.
“The confluence of Fed balance-sheet reduction and lower deficit expectations create some uncertainty regarding Treasury’s strategy,” said Jonathan Cohn, head of rates trading strategy at Credit Suisse Group AG. Fed QT “reduces the need for any further coupon size cuts beyond the coming quarter. Yet our expectations for reduced financing needs still imply scope this time for another round of significant nominal auction size cuts.”
Coupons refer to securities with interest payments, and are distinguished from bills, which are shorter-dated and don’t pay interest.
A representative forecast among dealers in Treasuries is from Wells Fargo Securities, with the following breakdown:
- A $104 billion total for the refunding
- No change to the size of two-, three- and and five-year notes
- A $2 billion per month cutback for seven-year notes
- A $1 billion cutback for 10- and 30-year new issues and reopenings
- A $4 billion reduction for 20-year bond new issues and reopenings
“We would not be surprised if auction sizes are left unchanged -- nor would we be surprised if modest cuts are extended to two-to-five-year tenors,” Wells Fargo strategists Zachary Griffiths and Michael Pugliese wrote in a note.
The Wells Fargo duo estimates the Fed’s balance-sheet runoff will increase the market supply of coupon Treasuries by nearly $1 trillion through the end of 2023. During that period, they see bill issuance rising roughly $125 billion.
The Treasury announced Monday it now anticipates an overall paydown in government debt this quarter, a turnaround after previously estimating net borrowing during the period. But Treasury officials noted the estimate doesn’t incorporate any assumption for the Fed scaling back its holdings of Treasuries.
Most dealers expect Treasury to try to keep stable the share of bills relative to overall debt outstanding. Investors’ demand for bills currently outstrips supply.
A slight reduction in the refunding would align with recommendations from the Treasury Borrowing Advisory Committee, a panel of top bond dealers and investors that confers with the Treasury. TBAC has advised keeping the share of T-bills in a 15%-20% range over the next few fiscal years. At the end of March, it was around 17%.
“These coupon cuts would clear out additional room for bill supply to increase and continue the process of right-sizing the seven- and 20-year issuance,” said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets.
Sales of Treasury Inflation-Protected Securities, known as TIPS, are forecast by dealers to be increased again in Wednesday’s plans. The government has been trying to increase TIPS as a share of the outstanding debt over time.
Amid a record influx of individual tax receipts -- propelled in part by climbing U.S. wages -- the Treasury’s cash balance has risen to nearly $1 trillion from less than $570 billion at the start of April. That prompted the Treasury to cut sales of some bills, which already are in short supply relative to strong demand.
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Jefferies economists Thomas Simons and Aneta Markowska are a small minority in calling for no changes in next week’s auctions. For them, that’s in part on the expectation the Treasury will want to avoid shaving back the sales only to have to bump them back up as Fed QT proceeds.
Underscoring the interest in how the Treasury will approach handling QT, the Treasury in its regular pre-refunding survey asked dealers for their updated expectations on the timing, pace and composition of the Fed’s balance-sheet runoff.
“Treasury will probably need to once again increase coupon issuance in the spring of next year,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA.
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