Treasury Sees Cutting Quarterly Bond Sales Soon as November
(Bloomberg) -- The U.S. Treasury set the stage for reduced government debt issuance in coming months, even as it kept its upcoming quarterly auction of long-term securities at a record size.
The Treasury, in a statement Wednesday, said it expected to announce auction-size reductions as soon as November. For the coming quarter, it offered no major changes in its strategy for issuing notes and bonds, and said it will sell $126 billion of long-term securities next week. The department said sales of inflation-protected securities will rise further, amid “solid demand.”
“Continuing current issuance sizes and patterns may provide more borrowing capacity than is needed to address borrowing needs over the intermediate-to-long term,” the Treasury also said. The department said it expected to announce auction-size reductions as soon as November.
Borrowing needs are set to drop as Covid-related government relief spending subsides and lawmakers work to raise revenue to pay for multi-year spending plans for infrastructure and social programs.
The Treasury also on Wednesday reiterated Secretary Janet Yellen’s recent warning that the department faces “considerable uncertainty” about how long it can forestall a payments default, through special accounting measures, after the federal debt ceiling was reinstated on Sunday. It said it couldn’t provide a “specific estimate of how long extraordinary measures will last.”
Read More: TBAC Suggests Cutting Nominal Coupon Auction Sizes in November
If Congress doesn’t raise or suspend the debt limit promptly, it runs the risk of disruptions in the market for Treasury bills, a Treasury official told reporters Wednesday.
Treasuries remained lower after the announcement, with 10-year yields at 1.14% as of 9:25 a.m. in New York.
“This is the only logical outcome given the information they have,” Jefferies economist Thomas Simons said of the plans for cutting auctions from November. “Without more clarity on infrastructure or the debt ceiling, they can’t make any additional changes.”
Next week’s auctions, known as the quarterly refunding, break down as follows:
- $58 billion of three-year notes on Aug. 10, unchanged from May
- $41 billion of 10-year notes on Aug. 11, also unchanged from May
- $27 billion of 30-year bonds on Aug. 12, the same as in May
- The refunding will raise $67.4 billion in new cash
Wall Street strategists have widely anticipated reductions to auction sizes, while diverging on the timing. Among the 24 primary dealers in U.S. government securities, just three expected smaller auctions during the August-to-October quarter, with many more seeing an announcement in November.
If the Treasury does proceed with a reduction in the November-to-January period, it would be the first in more than five years. Issuance had been climbing for years, thanks to surging federal budget deficits in the wake of former President Donald Trump’s tax cuts and, later, the emergency spending caused by the pandemic.
In Wednesday’s announcement, the Treasury also said:
- Sales of Treasury Inflation Protected Securities will continue a “gradual increase,” with total gross issuance climbing by $15 billion to $20 billion in the 2021 calendar year
- 30-year TIPS reopening in August will be $1 billion bigger than last year
- 10-year TIPS reopening in September will be $1 billion bigger than in May
- Five-year TIPS new issue in October will be $1 billion bigger than that in April
- Weekly issuance of six-week cash management bills will end after settlement Aug. 19
- Weekly issuance of 17-week cash management bills will continue at least through the end of October
- Treasury has completed review of a floating rate note tied to the Secured Overnight Financing Rate, or SOFR, and “will consider” whether it’s necessary to help meet intermediate to longer-term borrowing needs
The Treasury Borrowing Advisory Committee, made up of major dealers and investors, advised that the Treasury begin cutting its quarterly refundings from Novermber, and to proceed with “modestly larger reductions” in sales of seven-year and 20-year securities. The group, known as TBAC, also endorsed going ahead with a floating-rate note tied to SOFR.
Meantime, the Treasury is currently grappling with maneuvers to avoid hitting the federal debt limit, after a two-year suspension of the ceiling ended Sunday. Economists and strategists alike anticipate Congress will act to boost or suspend the limit again before the Treasury runs out of room to avert a payments default in the fall.
Lawmakers have not yet formulated a concrete plan to avert default, which the Congressional Budget Office has warned could come in October or November once Treasury exhausts special measures and its cash pile.
Efforts to address the expiration of the debt limit suspension, could, in some scenarios, cause the outstanding stock of bills and the Treasury’s cash balance to decline to “undesirable levels,” the TBAC said.
“The Committee believes that allowing these episodes to occur, given the challenges that they pose for Treasury market functioning, is a reckless and inappropriate approach to managing fiscal policy issues,” it wrote.
The Treasury on Monday said the government will borrow almost $1.4 trillion in the second half of the fiscal year, assuming lawmakers raise or suspend the newly reinstated debt limit. The department expects to issue $673 billion in net marketable debt from July through September, $148 billion less than it estimated in May. The department sees an end-of-September cash balance of $750 billion, unchanged from from its forecast three months ago.
TBAC also reiterated its previous recommendation of paring back the share of overall debt outstanding taken up by bills to 15% to 20%.
Wells Fargo analysts projected some $600 billion worth of T-bill “paydowns” from the fourth quarter of 2021 through year-end 2022. “This would put T-bills outstanding at roughly $3.7 trillion at year-end 2022, down about $1.3 trillion from the peak” in the second quarter of 2020, they wrote in a note Wednesday.
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