The Treasury kept its sales of longer-term debt steady for the third straight time, in line with dealers’ forecasts, while unexpectedly announcing a new program to buy back older securities, starting sometime in 2024.
(Bloomberg) — The Treasury kept its sales of longer-term debt steady for the third straight time, in line with dealers’ forecasts, while unexpectedly announcing a new program to buy back older securities, starting sometime in 2024.
With the budget deficit widening and the Federal Reserve steadily shrinking its holdings of Treasuries, US debt managers were widely anticipated to step up issuance of longer-term securities later in the year. The Treasury Department said Wednesday that may happen as soon as August — an earlier timeframe than many dealers thought.
For now, the upcoming round of 3-year, 10-year and 30-year auctions will total $96 billion, the same as in the so-called quarterly refundings in February and November. The tempo of issuance of other longer-dated notes was also kept steady.
“Based on projected intermediate- to long-term borrowing needs, Treasury may need to modestly increase auction sizes later this year, potentially as soon as the August 2023 refunding announcement,” the department said in a statement.
Separately, the Treasury announced that, after months of consideration, it’s kicking off a buyback program in the calendar year 2024. By buying back older securities and issuing more of the current benchmarks, one aim is to help bolster patchy liquidity in the Treasuries market. The program could also help the department to smooth out volatility in its issuance of Treasury bills as it manages its cash balance.
Read More: Faltering Market Liquidity Renews Prodding for Treasury Buybacks
“Treasury anticipates designing a buyback program that will be conducted in a regular and predictable manner, initially sized conservatively,” the statement said. The program is “not intended to meaningfully change the overall maturity profile of marketable debt outstanding,” it added.
Josh Frost, assistant secretary for financial markets at the Treasury, told reporters Wednesday that the department’s “latest and best thinking” on the structure for buybacks would be to initially use an existing Fed platform — thus only tapping primary dealers as counterparties — for the operations.
This would be “the most expedient way to get the program launched,” Frost said. However, “we anticipate accessing the potential costs and benefits of allowing other counterparties to participate directly in buybacks, but that at least initially we’d do so through the primary dealers.”
Further details on the buybacks structure will be unveiled in future quarterly refunding announcements, with more consultation to come with market participants, the Treasury said in their statement. It would mark the first regular buyback program in about two decades.
Debt Limit
“There are several operational issues and complexities that need to be addressed,” said Subadra Rajappa, head of US interest-rate strategy at Societe Generale SA. Waiting until 2024 would also get the Treasury past the current debt-limit situation, he said.
The Treasury in its statement reiterated Secretary Janet Yellen’s warning on Monday that the department faces the risk of running out of sufficient cash to make good on all federal obligations as soon as June 1.
Since hitting the current statutory debt limit of $31.4 trillion in January, the Treasury has been staving off a possible default on federal obligations by using special accounting maneuvers as well as running down its cash and trimming sales of Treasury bills.
“Until the debt limit is suspended or increased, debt limit-related constraints will lead to greater-than-normal variability in benchmark bill issuance and significant usage of cash management bills,” the Treasury said.
A high-stakes summit is now planned for May 9 between President Joe Biden and top congressional leaders on the debt limit.
As for next week’s auctions, they break down as follows:
- $40 billion of 3-year notes on May 9
- $35 billion of 10-year notes on May 10
- $21 billion of 30-year bonds on May 11
The Treasury said the upcoming issuance would raise new cash of about $20.8 billion.
Sales plans for Treasury Inflation-Protected Securities, or TIPS, were also kept unchanged compared with sizes over the prior quarter. But the Treasury added that it will “continue to monitor TIPS market conditions and consider whether modest increases would be appropriate in future quarters.”
With the Treasury constrained by the debt limit, reduced issuance of T-bills has seen them drift near the lower end of the 15% to 20% share of total debt recommended by the Treasury Borrowing Advisory Committee — a group comprising dealers, investors and other stakeholders, known as TBAC.
Most dealers see a deluge of new bill sales coming in the months following a resolution to the debt-cap issue. Keeping it below the 20% mark is one reason dealers have been expecting increased issuance of coupon-bearing debt. Many had anticipated that starting in November, with a smaller number projecting August.
Strategists at TD Securities predict that Treasury will issue nearly $900 billion of bills by the end of the fiscal year, on Sept. 30. They assume an increase in the debt ceiling will come in July, and forecast even more net bill issuance in the next fiscal year to help normalize the supply-demand imbalance at the front-end of the yield curve.
–With assistance from Christopher Condon.
(Updates with Treasury official’s comment in seventh and eighth paragraphs.)
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