The deficit has reached $1.39 trillion, a 170% increase, and traders are preparing for a $102 billion auction of Treasury bonds.
The deficit has reached $1.39 trillion, a 170% increase, and traders are preparing for a $102 billion auction of Treasury bonds.
The Treasury Boosts Long-Term Debt Issuance in Response to Rising Borrowing Needs
In a move that reflects the increasing borrowing needs of the United States, the Treasury has announced a boost to its quarterly refunding of longer-term Treasuries. This decision comes after the Federal Reserve raised interest rates to a 22-year high, causing yields on government debt to rise and making borrowing more expensive. To meet this growing demand, the Treasury will increase its refunding amount from $96 billion to $102 billion, suggesting its intention to sell more securities across the yield curve.
The decision to increase borrowing is driven by a combination of factors. On one hand, Federal Reserve rate hikes have led to higher yields on government debt. On the other hand, the Fed is shrinking its holdings of Treasuries, putting more pressure on the government to sell them to other buyers. This influx of supply raises concerns about potential volatility swings during government auctions.
Mark Cabana, the head of US interest-rate strategy at Bank of America Corp, commented on the situation, saying, “There’s just a lot of supply coming. We’ve been surprised by the deficit numbers, which are sobering.” Despite this supply increase, it’s important to note that larger amounts of debt issuance have not resulted in lower prices and higher yields in the past. However, the increased auction sizes contribute to the potential for short-term volatility, while banks have reduced appetites for market making.
The rise in yields is not only due to rate hikes but also driven by inflation, which widens the budget deficit. The cost of servicing US government debt has surged by 25% in the first nine months of the fiscal year, amounting to $652 billion. This is part of a global phenomenon driving public borrowing.
- Tupperware, a meme stock, surged 300% in the past month.
- Could Third-Party Candidates Affect Election? ANBLE Economic Forecasts
- Taxation of Retirees in All 50 States
Looking ahead, Cabana and his team forecast that the Treasury will continue to increase sales of coupon-bearing debt in the coming months. Dealers’ projections for the upcoming refunding auctions indicate the following amounts:
- $42 billion of 3-year notes on Aug. 8
- $37 billion of 10-year notes on Aug. 9
- $23 billion of 30-year bonds on Aug. 10
In addition to these sales, most dealers expect a lift in issuance across most maturities, with a $2 billion increase for each. However, there may be smaller increases for 7- and 20-year Treasuries, which have experienced poor demand in the past. Some dealers predict that the 20-year bond will not undergo any change in size, considering its history of weak pricing and liquidity since its relaunch in 2020.
Subadra Rajappa, the head of US interest rates strategy at Societe Generale SA, believes that the Treasury will distribute auction increases across the curve, with slightly smaller ones for the 7- and 20-year debt. Rajappa states, “It’s a one-way trajectory now for the deficit over the next 10 years, with them getting larger. Treasury wants to make sure they are well funded for the next several years.”
The federal deficit has reached $1.39 trillion for the first nine months of the current fiscal year, a 170% increase compared to the same period the previous year. This demonstrates the Treasury’s growing funding needs. On Monday, the Treasury will provide an update on its quarterly estimates for borrowing and its cash balance.
Amidst the Treasury’s increased borrowing, the Federal Reserve is shrinking its holdings of Treasuries by up to $60 billion a month, allowing securities to mature without replacing them. Fed Chair Jerome Powell has indicated that the portfolio runoff could continue even after interest rate cuts, suggesting a longer period for the quantitative tightening program than expected.
Another factor for the Treasury to consider is the ratio of short-term debt, known as bills, in overall debt outstanding. The Treasury Borrowing Advisory Committee has recommended maintaining a 15% to 20% range for this ratio, and investors will be watching for any updates regarding the targeted T-bill share of debt.
The Treasury has recently sold a significant number of bills to rebuild its cash balance after depleting it during the debt limit battle earlier this year. Citigroup Inc. highlights the importance of monitoring the Treasury’s plans for buybacks, which were first announced in May as a means to improve liquidity in the Treasuries market and manage volatility in T-bill issuance.
While the program is set to begin next year, the Treasury is still ironing out the details, and dealers expect an update on this during the pre-refunding survey questions.
In summary, the Treasury’s decision to boost long-term debt issuance reflects the increasing borrowing needs of the United States. As yields rise due to Federal Reserve rate hikes and inflation, the government is obligated to sell more securities to other buyers. This comes with the risk of short-term volatility, as banks have reduced their market-making activities. Despite the potential for volatility, the larger auction sizes contribute to meeting the growing demand for US government debt.
