THE US Treasury left its quarterly issuance of longer-term debt unchanged on Wednesday (May 1), as widely expected, while announcing that its first program to buy back existing securities in more than two decades will kick off this month.
The Treasury Department said in a statement on Wednesday that it will sell US$125 billion of securities at its so-called quarterly refunding auctions next week, which span three, 10 and 30-year Treasuries.
After three straight quarterly boosts to note and bond sales – which took many auction sizes to record levels – US debt managers had flagged in January that they did not expect further increases this year. They reiterated that they do not anticipate having to increase sales of regular notes and bonds “for at least the next several quarters”.
Pressure on the Treasury is expected to ease when the Federal Reserve slows its run-off of US government securities holdings – something many dealers see likely to be announced later on Wednesday.
The Treasury said its previous increases in issuance sizes “leave it well positioned to address potential changes to the fiscal outlook and to the pace and duration of future Soma redemptions.” Soma is an acronym referring to the Fed’s Treasuries holdings.
The Fed is currently allowing up to US$60 billion of Treasuries a month run off its balance sheet. Halving that amount, as many economists forecast, would reduce how much the Treasury needs to raise from private investors.
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Fed policymakers are set to release their policy statement at 2 pm in Washington. Chair Jerome Powell’s subsequent press briefing may offer clues on whether officials still expect to lower interest rates later this year – something that could help the Treasury stem its surging debt-interest bill.
Wednesday’s Treasury statement also offered long-awaited details on the department’s new buyback plan. These operations will be aimed at supporting market liquidity and improving cash management. Officials spent more than a year analysing the merits of buybacks and working out the structure for them.
The first operation is intended for May 29. Through July, the Treasury plans weekly buybacks of up to US$2 billion of nominal coupon securities, and up to US$500 million for Treasury inflation-protected securities (Tips).
The upcoming programme bears little resemblance to the buybacks from more than two decades ago. Those were launched during an historic period of budget surpluses, which gave officials the luxury of retiring some outstanding, higher-interest securities.
As for next week’s refunding auctions, the US$125 billion will be made up of the following:
US$58 billion of three-year notes on May 7
US$42 billion of 10-year notes on May 8
US$25 billion of 30-year bonds on May 9
The refunding will raise new cash of about US$17.2 billion. New three-year notes are auctioned monthly, and those were already lifted by the Treasury by a total of US$4 billion in March and April as part of the January refunding plan.
Turning to bills, which mature in one year or less, the Treasury announced that six-week cash-management bills (CMB) will serve as a new benchmark for this market.
“Investor reception to the six-week CMB has been strong, and elevation to benchmark status will further support demand,” the Treasury said. The decision was made after considering the outlook for bill supply over the medium term, the department said. By July, the Treasury anticipates short-dated bill auction sizes will head towards the highs seen in February and March.
Many dealers had expected large cuts to bill issuance over coming month.
Sales of floating-rate debt were also held stable over the coming three months, the Treasury said.
Some Tips sales will continue to increase, the Treasury said on Wednesday, as expected by many dealers, to maintain a stable share of these inflation-linked securities relative to overall debt.
The June reopening auction of five-year Tips will be raised by US$1 billion, as will the July new-issue of the 10-year maturity.
While the demise of Fed QT will help the Treasury, over time, the government is expected to need to resume boosting its longer-dated debt issuance given a continuing, historically high, budget deficit. Investors’ heightened focus on the US fiscal picture was on display on Monday, when yields oscillated after the Treasury lifted its borrowing estimate for the current quarter.
Officials asked the Treasury Borrowing Advisory Committee, a panel of market participants, for recommendations on how the government can minimise its borrowing costs and expand the investor base for Treasuries over time.
In their response, TBAC noted that the borrowing needs of the Treasury over the coming years were expected to trigger an increase in issuance. Their recommendations included adding new types of securities such as callable bonds, green bonds and new maturities of floating-rate and inflation-linked bonds. BLOOMBERG
