Treasury Explains Why It Pausing Its Reduction In Auction Sizes (Hint: It Has To Do With QE2)
One of the most fanfared decisions earlier in 2010 was the Treasury's
announcement that it would gradually begin to taper off the sizes of
upcoming treasury auctions. Too bad that that announcement assumed that
the economy would gradually stand to normalize, tax revenues would pick
up, and the Fed would never be forced to perform QE on itself again.
Alas, the recent issuance projection demonstrates, and as today's
refunding statement confirmed, this reduction is now over. In fact,
auction sizes may once again have to increase to accommodate the $100
billion a month incremental demand interest due to QE2. The statement
provided by Assistant Treasury
Secretary Mary Miller, who until recently was a fixed income manager at
T. Rowe Price, and even more recently stated that the Fed's buying plans won't affect UST issuance (oops), provides some insight into what the Treasury's more detailed refunding expectations are.
From the commentary to the refunding statement:
In recent months Treasury has reduced coupon offering sizes in the front-to-intermediate sectors of the nominal coupon curve. In total, these cuts have reduced Treasury’s annualized borrowing capacity by $328 billion. Based on current fiscal forecasts, coupon auction sizes are likely to remain steady over the coming quarter. Treasury will continue to monitor projected financing needs and make appropriate adjustments, as necessary.
And some other soundbites from Miller:
- Treasury's Miller says expects to reach debt ceiling sometime in the first half of 2011 (the Zero Hedge call is for a February 2011 event)
- Treasury's Miller says will be watching Fed easing plans, both Fed and Treasury want to maintain well-functioning Treasury market
- Treasury's Miller says Treasury has aligned borrowing to fiscal outlook, wants to maintain cushion for changes in outlook
- Treasury's Miller says wants to keep bills market deeply liquid, sees current level of 21% of issuance as appropriate
- Treasury's Miller says any steps Treasury will take to curtail auction sizes will be gradual
- Treasury's Miller says Treasury is not considering additional coupon issuance in response to potential Fed easing
That last one is a particularly gross misrepresentation of the truth. What is should advise is to look for the front-end and especially the belly (5-7 Y) to see a notable increase in auction size. Which is troubling because it means, as Zero Hedge has been noting since late 2010, and as Bruce Krasting and others have pointed out, that very soon the duration of the UST curve will once again begin to collapse. And for all those who have expressed a concern about the average maturity of outstanding debt (not to be confused with average duration of securities held by the Fed), the US Treasury has added a new function to its website, allowing for tracking of all the nuances associated with the treasury curve. The Excel file can be found here (we suggest bookmarking it).