(Bloomberg) -- The US Treasury left its quarterly auctions of longer-term debt unchanged and reiterated its guidance that sizes aren’t expected to be increased “for at least the next several quarters.”
The Treasury Department said in a statement Wednesday it will sell $125 billion of securities at next week’s so-called quarterly refunding auctions, which span 3-, 10- and 30-year maturities. Dealers had widely predicted that outcome.
“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 Treasury said in a statement, using the same language since May. FRN refers to floating-rate notes.
Given the passage of time, and the trajectory of US borrowing, a few bond strategists had cautioned the Treasury might revise its guidance on holding auction sizes steady. Many dealers expected no change, however, given that current sizes — some at record highs — are likely to be sufficient for meeting the government’s funding needs until the second half of 2025.
With neither former President Donald Trump nor Vice President Kamala Harris making deficit reduction a central element of their campaigns, hoisting longer-term debt sales is inevitable at some point, in the view of most dealers and economists.
Auction Anxiety
Some auctions have sparked concerns about the size of issuance. The latest monthly auctions of 2- and 5-year securities, for example, drew higher-than-anticipated yields, showcasing such worries.
As for next week’s refunding auctions, the $125 billion will be made up of the following:
- $58 billion of 3-year notes on Nov. 4
- $42 billion of 10-year notes on Nov. 5
- $25 billion of 30-year bonds on Nov. 6
The refunding will raise new cash of about $8.6 billion.
Over the three month period, the Treasury said it plans to use bills — which mature in up to a year — to address any seasonal or unexpected variations in borrowing needs. The department expects to implement “modest reductions” to short-dated bills in December before boosting them again in January.
Some strategists warned ahead of Wednesday’s announcement to take the Treasury’s new guidance with a grain of salt — given how it’s the final refunding for the Biden administration. Depending on who wins the Nov. 5 presidential election, there may be changes in US debt management strategy, along with personnel.
Whoever wins, the incoming administration is likely to have to contend with operating under the constraint of the federal debt limit, which is scheduled to kick back in at the start of January. Unless Congress swiftly re-suspends or boosts the ceiling, the Treasury will have to rely on a series of extraordinary measures, along with cuts to bill issuance and the cash balance, to make good on its spending obligations.
Treasury Borrowing Advisory Commitee, a panel of outside advisers composed of dealers, fund managers and other market participants, in a separate statement Wednesday “emphasized the risk that debt limit constraints could hamper the efficient funding of the government at the lowest possible cost to the taxpayer.”
Debt Limit
“Lack of resolution of the debt limit runs the risk of undermining the foundation of the US Treasury market,” the TBAC said. “These episodes can cause significant economic uncertainty, affect financial markets and impact US credit ratings.”
The debt limit will resume just as the Treasury faces high seasonal borrowing pressures. On Monday, it advised that it faces a net borrowing requirement of some $823 billion in the three months through March — a record nominal amount for that quarter. The estimate assumes Congress will act in time to lift or set aside the debt limit.
“You’ve heard this from Treasury over the years, the one path here is for Congress to raise or suspend the debt limit in a timely fashion,” Josh Frost, the Treasury’s assistant secretary for financial markets, said in a press briefing. “Regardless of what happens in terms of timing, we believe that the guidance we’ve provided on bill issuance in January would hold,” he also said.
One dynamic that would help the Treasury is a further slowdown, or end, to the Federal Reserve’s runoff of its Treasuries holdings. The Fed currently lets up to $25 billion mature a month without replacement — a dynamic that forces the Treasury to sell more to the public. The Fed holds its next policy meeting Nov. 6-7.
With regard to Treasury Inflation Protected Securities, or TIPS, the department again made some modest increases as it works to maintain a stable share of these securities relative to overall debt outstanding. Over the three months through January, the Treasury plans:
- To keep the November 10-year TIPS reopening auction at $17 billion
- Increase the December 5-year TIPS reopening auction by $1 billion, to $22 billion
- Boost the January 10-year TIPS new issue auction by $1 billion, to $20 billion
In its quarterly survey of dealers ahead of the refunding, the department had asked whether it should consider adding to its current lineup of three TIPS maturities.
The Treasury also asked the TBAC for thoughts on the use of digital technology in the Treasuries market, such as the potential benefits and costs of tokenizing Treasuries, and the use of blockchains. “What effects might these trends have on recommended Treasury issuance” and trading in the secondary market, officials asked.
Wednesday’s statement also detailed a new schedule of buybacks for the November-to-early February period. The Treasury began buyback operations in May that are aimed to support market liquidity. In September, it also launched buybacks for cash management purposes.
The TBAC said that the new buyback program “continues to be modestly supportive of liquidity, including from cash management buybacks.”
(Adds Treasury official’s comments in third paragraph after ‘Debt Limit’ subheadline.)
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