(Bloomberg) -- The US Treasury left its quarterly issuance of longer-term debt unchanged for the second straight time, and maintained its guidance that it doesn’t expect to need increasing issuance of notes and bonds for “several quarters.”
The Treasury Department said in a statement Wednesday it will sell $125 billion of securities at its so-called quarterly refunding auctions next week, which span 3-, 10- and 30-year maturities. Dealers had widely predicted that outcome, seeing the department as able to make up any funding shortfalls over the period via more bill sales.
A number of market participants had seen some risk that the Treasury would revise its guidance to incorporate the potential for increasing issuance of longer-dated securities, given the outsize federal budget deficit. But the department reiterated its May language.
“Based on current projected borrowing needs, Treasury does not anticipate needing to increase nominal coupon or FRN auction sizes for at least the next several quarters,” the statement said. FRNs are floating-rate notes.
Treasury yields moved lower following the announcement, amid a swath of economic data released Wednesday. US debt managers also said they were stepping up the amount of debt that the department will be buying back over coming months. That buyback program was launched earlier this year, aimed at supporting market liquidity. Ten-year yields were down about 4 basis points, at 4.10%.
TBAC and Bills
Separately, officials asked the Treasury Borrowing Advisory Committee — an outside panel of dealers and other market participants that counsels the department — to take another look at the recommended share of bills, which mature in up to a year, as a total of marketable debt. TBAC had previously recommended a 15% to 20% range.
The request to TBAC follows a number of Republican politicians and economic-policy commentators having 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.
“Most” TBAC members this time indicated that averaging around 20% over time was a good tradeoff between interest-rate costs, volatility in financing and the risk of rolling over a major amount of debt at one time, the panel said in a separate report.
They also said that the bill share of total debt shouldn’t be the first consideration for US debt managers as they decide on issuance. TBAC members highlighted that the key is to continue to follow a regular and predictable framework. They said a 15% T-bill share was recommended as as the lower bound for proper market functioning.
Treasury officials on Wednesday drew attention to TBAC’s emphasis on regular and predictable note and bond issuance over any notion of hewing to a specific ratio for bills. The officials also flagged that TBAC’s recommendation is no longer framed as a 15% to 20% range, officials said.
With the Federal Reserve now having reduced the amount of Treasuries it’s letting mature each month without replacement, that has in turn eased the burden on the Treasury to sell more debt to the public to fund the fiscal deficit.
Later Wednesday, the Fed is widely expected to signal it will start lowering interest rates, offering further relief for the Treasury by reducing the government’s debt-servicing bill. The pace of so-called quantitative tightening — the amount the central bank is shrinking its balance sheet, is seen staying at the current amount of up to $25 billion a month for Treasuries.
The Fed’s decision is due at 2 p.m. in Washington.
As for next week’s refunding auctions, the $125 billion will be made up of the following:
- $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
The refunding will raise new cash of about $14 billion.
Many dealers have said over recent weeks that the Treasury will eventually have to bump note and bond sales higher again given the fiscal outlook. The US is on track to run its largest federal deficit outside of crisis times. Marketable Treasury debt outstanding has already grown to $27 trillion from about $12 trillion a decade ago.
On the trajectory of the sales of bills, the department said Wednesday it expects to “modestly increase the offering size of short-dated bills being auctioned next week,” then keep that cadence through August. It sees modest reductions in early to mid-September, when certain taxes are due. Over October, it anticipates increasing “all bill auction sizes” given the fiscal situation.
The supply of bills has increased by around $2.2 trillion since the start of last year. That left their share of total debt above the 15%-to-20% range that TBAC previously recommended, before Wednesday’s new guidance.
Treasury officials have repeatedly said this isn’t a problem and highlighted that TBAC’s endorsement of the need to maintain flexibility. In Wednesday’s statement, TBAC doubled down on that: “the committee unanimously noted the importance for Treasury to retain flexibility to adapt this over time with evolving market dynamics.”
Sales of floating-rate debt were also kept unchanged for the coming three months, the Treasury said. With regard to Treasury Inflation Protected Securities, or TIPS, the department lifted the size of the October 5-year TIPS auction — the only new issue during the quarter — by $1 billion. It also boosted the September 10-year TIPS reopening by $1 billion.
Wednesday’s statement also detailed a new schedule of buybacks for the August-to-October period. In May, after over a year of analysis, the Treasury launched a new buyback program, with operations aimed for supporting market liquidity. The Treasury said it plans to conduct cash management buybacks in September 2024.
(Adds market reaction and more details on TBAC recommendations)
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