(Bloomberg) -- The US Treasury’s updated plans for debt sales, a signature event for bond dealers every quarter, now loom also as a politically sensitive one, after the Biden administration was accused by some Republicans of manipulating issuance tactics.
On Wednesday, dealers expect the Treasury in its so-called quarterly refunding announcement to abide by its previous guidance and hold sales of longer-term securities steady for the second straight quarter.
A number of Republican politicians and economic-policy commentators have charged Treasury Secretary Janet Yellen and her team of artificially tempering the size of these longer-term securities, choosing instead to use short-term debt known as bills to address extra funding needs. They argue it’s part of an effort to depress yields and bolster the economy, along with Democrats’ fortunes, ahead of the election.
Yellen Friday said there “is no such strategy” to attempt to ease financial conditions. Josh Frost, who oversees federal debt sales, delivered a detailed speech earlier this month explaining each aspect of Treasury issuance, showcasing how the department’s decisions have been well within normal bounds and in keeping with the expectations — as well as the recommendations — of market participants.
But the federal borrowing need is gargantuan, and debt buyers are on the lookout for any hints that the Treasury sees bigger long-term debt sales on the horizon. In May, the department said that the current, already lofty, auction sizes for notes and bonds likely would be sufficient “for at least the next several quarters.”
“We don’t expect Treasury to change their previous guidance now, because they can continue to use bills to handle extra funding needs,” said Jason Williams, a strategist at Citigroup Inc.
Bills mature in up to a year, and their prices are closely tied to the Federal Reserve’s benchmark interest rate. With inflation having slowed significantly in recent months, Fed officials — whose next policy meeting ends Wednesday afternoon — are widely expected to signal that they’ll start cutting that rate in September. Lower rates would help temper the cost of bills, which have climbed as a share of the Treasury’s total debt outstanding.
Relying on bills for now “makes sense because they will benefit from the Fed cutting rates,” Williams said. “So why would Treasury not lean on bills a little bit longer.”
Keeping the status quo for now would mean the Treasury on Wednesday announces that its coming round of refunding auctions — made up of 3-, 10- and 30-year securities — will again total $125 billion. That would break down as follows:
- $58 billion of 3-year notes on Aug. 6
- $42 billion of 10-year notes on Aug. 7
- $25 billion of 30-year bonds on Aug. 8
While many dealers foresee a repeat of the May guidance on keeping note and bond auctions steady for “several” quarters, banks including Barclays Plc, Bank of America Corp. and Goldman Sachs Group Inc. said it’s possible the Treasury could modify it, given worsening deficit projections.
“Near term, Treasury has the solution, they are going to do more bills,” said Meghan Swiber, a US rates strategist at Bank of America. But in its guidance on Wednesday, the department “may shift the language to suggest that in coming quarters Treasury may have to consider coupon supply increases again.”
Setting the stage now for increases later could help to avert a negative market impact when officials do need to sell more longer-dated debt, some market participants argue.
Depending on the deficit, it could “eventually warrant an aggressive pace of increases down the road,” Anshul Pradhan, head of US rates strategy at Barclays, wrote in a note. “We think it would be prudent to tweak the guidance to allow for incremental increases starting earlier.”
Yellen’s team in November tempered a ramp-up in issuance of longer-term Treasuries, and leaned even more heavily on bills. Bills are viewed by officials and market participants alike as a sort of shock absorber for borrowing and have climbed as a share of the total debt outstanding.
The ratio has lately exceeded the 15%-to-20% range that the Treasury Borrowing Advisory Committee, an outside group of investors, dealers and other market participants, had previously recommended. TBAC had itself indicated there was “flexibility” around that recommendation.
The supply of bills has increased by around $2.2 trillion since the start of last year, and investors investors didn’t bat an eye, scooping them up even when other risk-free rates were higher.
The original TBAC recommendation came in 2020, before the increase in short-term rates that has helped to propel demand for bills. Jay Barry, co-head of US rates strategy at JPMorgan Chase & Co., said that the Treasury and TBAC may revisit the 15%-20% framework at some point.
What Bloomberg Intelligence Says..
“Current Treasury coupon auction sizes are unlikely to be increased at the upcoming quarterly refunding announcement, with higher borrowing needs satisfied with additional T-bill issuance. Bloomberg Economics sees a fiscal 2024 deficit of $1.85 trillion, with relative stability around $1.9 trillion for the remainder of our forecast horizon.”
—— Ira F. Jersey and Will Hoffman, BI strategists
Click here to read the full report
Barclays sees the Treasury’s bill issuance rising by a net $600 billion in 2024, slowing to $300 billion in 2025.
The cost of bills may start coming down within weeks. Swaps traders are pricing in the first Fed benchmark rate reduction in September with two quarter-point cuts and some chance of a third by year-end.
Meantime, dealers expect the Treasury on Wednesday to keep the sizes of floating-rate debt sales stable over the coming three months. Treasury Inflation-Protected Securities, or TIPS, sales are the only type of debt forecast by dealers to see some increases.
Ahead of the refunding, the Treasury on Monday updated its quarterly borrowing requirement estimate for the July-to-September period, now seeing it at a net $740 billion, down from $847 billion. The previous forecast preceded the Fed’s June slowdown in the runoff of its holdings of Treasuries. That runoff has been forcing the Treasury to borrow more from the public.
The Treasury in also penciled in a year-end cash balance of $700 billion, a figure that will affect calculations for when the department will run out of cash next year if Congress fails to re-suspend or increase the debt limit. The ceiling is set to kick back in Jan. 2, barring the government from issuing net new debt.
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--With assistance from Catarina Saraiva.
(Updates with quarterly borrowing estimate in final two paragraphs.)
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