The US Treasury refrained from any major shift in its debt-issuance strategy, meeting dealers’ expectations in the face of speculation that officials might take steps to bring down longer-term borrowing costs.
In its so-called quarterly refunding statement Wednesday, the department said it anticipated keeping auction sizes unchanged for nominal notes, bonds and floating-rate notes, “for at least the next several quarters.” US debt managers have been using that same forward guidance for two years now.
The Treasury also said it’s “monitoring” the Federal Reserve’s expanded purchases of bills, which mature in a year or less. The central bank in December said it would buy $40 billion a month of them until April, in an effort to ensure ample reserves in the banking system. And the department is keeping an eye on “growing demand for Treasury bills from the private sector.”
Even with the nod to that expanded appetite for bills, the Treasury reiterated its comments from November that, looking ahead, it is evaluating “potential future increases to nominal coupon and FRN auction sizes, with a focus on trends in structural demand and potential costs and risks of various issuance profiles.”
The department has for some time relied on bills to fund the steadily increasing amount of federal spending. Amid that focus, some market participants ahead of Wednesday’s release reported speculation of aggressive moves to outright reduce bond issuance to help pull down yields that serve as a benchmark for mortgages and other loans.
‘Disappointed’ Reaction
Ten-year yields hit their highs of the session after the Treasury’s release, and were around 4.29% at 8:54 a.m. in New York.
“The market is disappointed on no hint from Treasury” about prospects for reduced supply of long-end debt, said Priya Misra, portfolio manager at JPMorgan Investment Management.
Any immediate move to cut sales of bonds, or 10-year notes — Treasury Secretary Scott Bessent’s key financial metric — would have run, however, against the department’s long-standing pledge to be “regular and predictable” in its debt management. Bessent himself invoked that language in a speech in November.
As for next week’s refunding auctions, they will total $125 billion, made up of:
- $58 billion of 3-year notes on Feb. 10
- $42 billion of 10-year notes on Feb. 11
- $25 billion of 30-year bonds on Feb. 12
The refunding will raise new cash of approximately $34.8 billion, the Treasury said.
Turning to inflation-linked debt, known as TIPS — Treasury inflation-protected securities — the department said it’s keeping auction sizes at current levels. That follows a long period during which officials had been boosting some sales in order to keep the TIPS share of the overall market steady.
Dealers were divided on what officials would do ahead of the statement, with some seeing no change in TIPS while several anticipating at least one of the coming quarter’s three TIPS auctions to be increased.
As for the immediate outlook for bills, the Treasury said it “expects to maintain the offering sizes of benchmark bills at or near current levels into mid-March.” After that it anticipates paring those back incrementally ahead of the April 15 tax filing due date – around which it typically receives an influx of cash.
Fed’s Purchases
“These reductions will likely lead to a cumulative $250-300 billion net decline in total bill supply by early May,” the Treasury said.
The Fed’s current scale of bill purchases reduce “the risk of Treasury oversupplying” the market with more bills than investors are prepared to handle, Morgan Stanley strategists led by Martin Tobias wrote in their refunding preview.
Beyond April, the Fed’s plans are unclear, however — all the more so given Kevin Warsh’s nomination to become the next chair in May. Warsh has in the past advocated shrinking the Fed’s securities portfolio.
Read More: Warsh Return Renews Tension on Fed $6.6 Trillion QE Hangover
Because of the government’s continuing outsize fiscal deficits — of almost $2 trillion a year — and due the waves of maturing medium-term securities in coming years — most dealers see the Treasury as having to boost coupons, or interest-bearing debt, at some point.
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Read more articles by Christopher Anstey, Michael MacKenzie
