The US Treasury boosted the size of its quarterly sale of longer-term debt for the first time in over 2 1/2 years, testing dealers’ appetites amid an increase in government borrowing needs so alarming it helped spur Fitch Ratings to cut the US sovereign rating from AAA.
(Bloomberg) — The US Treasury boosted the size of its quarterly sale of longer-term debt for the first time in over 2 1/2 years, testing dealers’ appetites amid an increase in government borrowing needs so alarming it helped spur Fitch Ratings to cut the US sovereign rating from AAA.
The Treasury said it will sell $103 billion of longer-term securities at its so-called quarterly refunding auctions next week, which span 3-, 10- and 30-year Treasuries. That’s up from a $96 billion total last time, and slightly larger than most dealers had expected.
The bump in issuance showcases the rising borrowing needs that contributed to Tuesday’s decision by Fitch Ratings to lower the sovereign US credit rating by one level, to AA+. Fitch said it expects US finances to deteriorate over the next three years. That’s from an already enlarged position — the Treasury is penciling in some $1 trillion worth of issuance in all this quarter.
Ahead of the announcement, dealers had also laid out expectations for stepped-up issuance of other securities, and for the boosts in sales to stretch into 2024, which the Treasury confirmed on Wednesday.
“While these changes will make substantial progress towards aligning auction sizes with intermediate- to long-term borrowing needs, further gradual increases will likely be necessary in future quarters” the department said in a statement.
Part of that deterioration is thanks to higher interest the Treasury now pays on its debt. The Treasury has also said its tax receipts have been weaker than expected. And in the meantime, the Federal Reserve’s continuing runoff of its holdings of Treasuries, of up to $60 billion a month, requires the government to sell more to the public.
The scale of future increases of longer-term debt issuance will depend on the fiscal picture and on how long the Fed keeps shrinking its bond portfolio, the Treasury said Wednesday.
US debt managers also detailed plans over coming months to lift sales of nominal Treasuries of all other maturities, in differing amounts depending on the security.
Treasuries dropped in wake of the release, with benchmark 10-year yields rising to as high as about 4.08%, a gain of around 5 basis points relative to Tuesday’s close.
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“With larger auctions confirmed for the coming quarter, the selloff has extended,” BMO Capital Markets strategist Benjamin Jeffery said in a note. “The question from here is if investors will be willing to buy the dip ahead of payrolls” data released on Friday, “or if the selloff has room to extend” amid debate on the appropriate discount for longer-term debt, he said.
Part of the rationale for boosting sales of coupon-bearing debt — as notes that pay interest are known — is to ensure that the share of debt made up by bills, which mature in short-term spans of up to a year, doesn’t exceed the recommended range.
The Treasury said on Monday it’s targeting an increase in its cash balance to $750 billion at year-end. According to Barclays Plc strategist Joseph Abate, that would cause T-bills to exceed the 20% ceiling of overall debt suggested by the Treasury Borrowing Advisory Committee, a panel of bond-market participants.
Bill Sales
Indeed, the Treasury said Wednesday that it “anticipates further moderate increases in Treasury bill auction sizes in the coming days” as it keeps rebuilding its cash pile.
In a statement released Wednesday, the TBAC indicated that exceeding the recommended share of bills for a time wouldn’t pose a problem.
“The committee expressed comfort with the possibility that the Treasury bill share as percentage of total marketable debt outstanding might temporarily rise above their recommended range, given robust demand for bills,” the panel said.
Issuance plans for Treasury Inflation-Protected Securities, or TIPS, were held steady except for the 5-year maturity, where October’s new-issue auction will go up by $1 billion. Floating-rate note auction sizes were increased by $2 billion.
As for next week’s refunding auctions, they break down as follows:
- $42 billion of 3-year notes on Aug. 8, compared with $40 billion at the May refunding and at the last auction in July
- $38 billion of 10-year notes on Aug. 9, compared with $35 billion last quarter
- $23 billion of 30-year bonds on Aug. 10, versus $21 billion in May
- The refunding will raise about $19 billion in new cash
The Treasury also detailed increases to nominal debt of other maturities over coming months as follows:
- Sales of 2- and 5-year note auctions will each be hoisted by $3 billion per month over the next three months
- Issuance of 3-year notes will rise by $2 billion a month
- Increases for 7-year notes by $1 billion per month over the next three months
- Lifts to both the new and reopened 20-year bond auction sizes by $1 billion, starting in August
- Increases both the new and reopened 10-year note auction sizes by $3 billion, starting in August
- Boosts both the new and reopened 30-year bond auction sizes by $2 billion, starting in August
Separately, after announcing in May that it would launch a buyback program in the calendar year 2024, the Treasury said “significant progress” has been made in designing it. Initially, the operations will be set at a maximum of $30 billion per quarter, the department said in a statement.
The buybacks have a two-fold aim, one being to bolster liquidity in some pockets of the market and the other to help smooth the volatility of bill issuance as it manages its cash balance.
The Treasury said it would provide further public guidance in future quarterly refunding announcements.
–With assistance from Christopher Condon.
(Adds detail on market reaction in ninth paragraph and strategist comment in the tenth.)
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