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U.S. 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. U.S. 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.

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