Wall Street is having fearful flashbacks to 2015, the last time a political standoff over the nation’s borrowing limit caused the Treasury to postpone one of its regular monthly auctions of long-term debt.
(Bloomberg) — Wall Street is having fearful flashbacks to 2015, the last time a political standoff over the nation’s borrowing limit caused the Treasury to postpone one of its regular monthly auctions of long-term debt.
Thus far, only short-term debt — Treasury bills maturing in no more than a year — has been curtailed to keep total debt under the $34.1 trillion statutory ceiling. But supply is volatile under normal circumstances. By contrast, auctions of long-term debt are “regular and predictable,” in the department’s parlance.
Treasury notes and bonds maturing in two to 30 years are auctioned monthly, at sizes that are telegraphed in advance, and trading is concentrated in the most recently issued ones. A postponed auction would leave traders seeking an exact maturity high and dry.
While it’s still too soon to predict a disruption to the auction schedule, the sales that appear to be most at risk are the three slated to take place June 12-13. They include a new three-year note, and reopenings of the 10-year note and 30-year bond introduced this month.
Those auctions are slated to be formally announced on June 8, smack in the middle of the period between June 1 — when Treasury Secretary Janet Yellen has said resources may be exhausted — and June 15, when an infusion of tax revenue is anticipated.
Thomas Simons, senior economist at Jefferies, is counting on a resolution that allows long-term debt auctions to remain on their pre-ordained schedule. The worst he’s currently prepared to imagine is some sort of special announcement on June 8 — “a heads-up that maybe by next week we might have to amend the schedule and delay a note auction.”
Such a statement could discourage traders from their normal practice of “when-issued” trading of the new notes and bonds, beginning when the auctions are announced and ending when they settle, in this case on June 15.
In the 2015 episode, US debt managers delayed a planned two-year note sale because of the risk it couldn’t be settled without a debt-ceiling increase. It rescheduled the sale about a week after Congress approved one. That was the first long-term debt auction delay since the early 2000s.
The period between June 2 and June 14 “is the danger zone,” said Blake Gwinn, head of US interest-rate strategy at RBC Capital Markets. “Any auctions in the first half of June could have potential disruptions.”
From 1995 to 2010, five note auctions or announcements were delayed, according to a report by the Government Accountability Office.
“These actions introduced uncertainty into the market for Treasury securities, and in some circumstances may have increased borrowing costs,” the GAO report said. “Regular and predictable auctions provide investors greater certainty and better information with which to plan their investments.”
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This week’s auctions of two-, five- and seven-year notes are the last long-term debt sales before the June 8 announcement.
In the meantime, a scheduled announcement on Thursday of next week’s 3- and 6-month bill sales is at risk, according to Lou Crandall, chief economist at Wrightson ICAP LLC.
“The Treasury needs to be able to tell the market whether — and how — it can accommodate the settlement of those issues before it announces them,” Crandall said in a note.
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