US Treasury Plans Increased Auctions to Fund Looming Trillion-Dollar Deficits (#GotBitcoin?
The department introduced a new two-month Treasury bill and will consider an additional auction of inflation-protected securities. US Treasury Plans Increased Auctions to Fund Looming Trillion-Dollar Deficits
The U.S. Treasury Department will step up auctions of U.S. debt by an additional $30 billion over the next three months and introduced a new product—a two-month Treasury bill—as part of its strategy to prepare to finance trillion-dollar government deficits in the years ahead.
From August to October, the Treasury will increase the size of its monthly auctions for two-year, three-year and five-year notes by $1 billion a month, continuing a strategy of gradually increasing the size of auctions at the mid-ranges of the debt that Treasury issues.
The Treasury made the announcement Wednesday in Washington as part of its regular schedule of quarterly refunding statements. Investors and debt analysts said the Treasury’s strategy remains consistent with expectations in the bond market, and that they expect demand to remain steady as auction sizes increase.
“Everyone thinks we won’t have a problem financing trillion-dollar deficits until we have one,” said Brian Edmonds, head of Treasury trading at Cantor Fitzgerald LP.
The Treasury is increasing its borrowing against a backdrop of strong economic growth in the U.S., which has encouraged the Federal Reserve to raise interest rates and to reduce how much it reinvests in the maturing securities in its bond portfolio.
Deficits are poised to soar as government spending has increased and signs point to a softening in tax revenue. The Treasury Department said last month that tax receipts fell 7% in June compared with the same month a year ago, including a 33% drop in gross corporate taxes.
“That’s part of the equation people haven’t been talking about,” said Ian Lyngen, head of U.S. government bond strategy at BMO Capital Markets. “The notion that tax reforms are going to pay for themselves is being tested right now.”
The White House’s Office of Management and Budget said last month that deficits would clock in at about $1 trillion a year from 2019 to 2022.
In total, the Treasury plans to borrow $329 billion in privately held net marketable debt from July to September, and an addition $440 billion in October to December. The Treasury’s Borrowing Advisory Committee, made up of representatives from investment funds and banks, said Wednesday the Treasury would need to continue to ratchet up the size of monthly auctions to fund deficits in coming years.
The advisory committee told the Treasury that Treasury’s recent strategy of increasing its auction sizes has been “more gradual than TBAC’s recommendation” and said that increased debt issuance has “been well absorbed by the market.” The TBAC said that “there may be more capacity to increase issuance in 5-year notes and the longer part of the curve moving forward.”
Many analysts and investors expect these developments will ultimately lead to higher borrowing costs for the U.S. government.
On Wednesday, the yield on the 10-year Treasury climbed above 3% for the first time since June. Shorter-term interest rates have also been rising as the Federal Reserve continues its strategy of gradually raising its target rate.
Because Treasury securities are a benchmark rate that are used to help set interest rates on mortgages, business loans and consumer debt, analysts expect borrowing costs to rise throughout the economy, potentially creating a drag on growth.
“It’s higher rates for everyone,” said Andrew Brenner, head of global fixed-income at NatAlliance Securities.
While Treasury’s strategy of issuing more debt has focused on securities with midrange durations, the Treasury will also make smaller increases in the size of seven-year and 10-year notes, as well as the 30-year bond, which will both increase by $1 billion over the next quarter.
Beginning in October, the Treasury will hold an auction for a new two-month Treasury bill, and the department is also considering adding an additional auction for five-year Treasury inflation-protected securities, known as TIPS.
Rising Tide Of U.S. Treasury Sales May Be Cresting And Not A Moment Too Soon
The rising tide of U.S. Treasury sales may be cresting
Steep increases in the size of U.S. government bond auctions over the past year are showing signs of making it difficult to drum up demand.
February’s auction of seven-year debt produced a record low number of bids for the amount being sold. That showed the pool of buyers was taxed after sales of the maturity swelled by $3 billion a month since April 2020 to $62 billion by January. Last month’s auction wasn’t that much better. And 20-year bond offerings have struggled, too, since they returned in May.
But the size of such auctions are poised to start declining later this year, some Wall Street strategists predict, ending a torrid pace of increases as the federal government spent heavily to soften the hit of the pandemic. It would be the first such slowdown since 2016, potentially easing the pressure on a market where yields surged during the first three months of the year on speculation that the economic rebound and federal spending increases will cause inflation to accelerate.
“Smaller auctions would be easier to digest” and allow for increased sales of scarce Treasury bills, Jefferies economist Thomas Simons said. At the same time, “the signal that we’ve hit the top in supply would help to tighten up the auctions even before the cuts come.”
Such a pullback would reflect the steep rebound in economic growth after federal stimulus efforts and the steady roll out of the Covid-19 vaccines. As a result, if the pace of borrowing remains the same, the federal government is likely to have far more cash than it needs even as it continues to contend with budget shortfalls.
No such plans have been announced by the Treasury Department and the timing of any cutback is far from certain. Moreover, the passage of President Joe Biden’s infrastructure plan could influence how much needs to be borrowed, as could the potential reinstatement of the federal debt ceiling at the end of July. That’s left some analysts skeptical the cuts will come as soon as this year.
“Throughout the pandemic Treasury has been conservative — that is, they raised more debt quickly and maintained a higher cash balance,” said Zachary Griffiths, a rates strategist at Wells Fargo & Co. “We expect them to maintain that mantra going forward as there is still plenty of uncertainty in the outlook.”
Even so, analysts project that the size of the debt offerings will almost certainly be pared back eventually. Barclays Plc interest-rate strategists Anshul Pradhan and Andres Mok estimate that if no changes are made to the Treasury’s auction sizes the government would raise $400 billion more than it needs in the current fiscal year and more than $1 trillion more in each of the following two years.
If the auctions aren’t cut “it would be significantly over-funded next year and the year after,” the Barclays strategists wrote in an April 8 report. The bank projects a drop of 10% to 20% in Treasury issue sizes over six months, a trend that would reduce quarterly sales of 10-year notes from $117 billion in the May-July quarter to $105 billion in November 2021-January 2022.
The step would be a welcome shift to investors, with the market already showing some early signs of testing the Treasury’s long-running ability to ramp up borrowing with impunity. The 20-year bond outperformed on Friday after the Treasury’s quarter dealer survey asked whether changes to its size should be considered, showing how tweaks may affect the market dynamics.
While most auctions have continued to go smoothly and yields remain low by historical standards, there have been some signals that demand is being taxed.
The seven-year auction on Feb. 25, for example, drew a yield more than four basis points higher than dealers expected as the bid-to-cover ratio hit a record low. Those results deepened the market’s biggest daily selloff since March 2020, driving the benchmark 10-year yield up more than 14 basis points that day to more than 1.5% for the first time in nearly a year. It’s now around 1.6%.
“The amount of duration dealers are absorbing at auction each month has doubled over the past year, while risk-taking capacity remains constrained,” JPMorgan Chase & Co. strategists wrote last month.
TD Securities also predicts auction-size cuts starting in November if tax increases offset the cost of government spending. In any case, head of U.S. rates strategy Priya Misra said, the Treasury has ample capacity to increase sales of short-term bills — instead of longer-term bonds — to fund new spending.
Cutting auction sizes also would blunt the impact if improving economic conditions cause the Fed to reduce its purchases of Treasury securities from the current $80-billion-a-month pace.
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