Just two days after the Treasury unexpectedly hiked its forecast for debt issuance in the current quarter by $270BN from $677BN to $947BN (after a record $2.75 trillion last quarter)...
... it was generally expected that today's quarterly refunding announcement would be another blowout with the Treasury expanding its issuance of longer-term debt in coming months, after depending mainly on shorter-dated bills to fund the record deficit.
Sure enough, it was all that and more.
Specifically, the Treasury announced that it would offer a record $112 billion of long-term Treasurys to refund approximately $49.5 billion of Treasury maturing on August 15, 2020. This issuance will raise new cash of approximately $62.5 billion. The securities are:
- $48BN in 3-year notes maturing August 15, 2023, Exp. $48BN vs $42BN in May;
- $38BN in 10-year notes maturing August 15, 2030; Exp. $35BN, vs $32BN in May;
- $26BN in 30-year bonds maturing August 15, 2050, Exp. $25BN vs $22BN in May;
In addition, the Treasury also announced that it anticipates increasing the sizes of the 2-, 3-, and 5-year note auctions by $2 billion per month. As a result, the size of the 2-, 3-, and 5-year note auctions will each increase by $6 billion by the end of October. Treasury also anticipates increasing the size of the 7-year note auction by $3 billion per month over the next three months. As a result, the size of the 7-year note auction will increase by $9 billion by the end of October.
Treasury is also announcing increases of $6 billion to both the new and reopened 10-year note auction sizes, and increases of $4 billion to both the new and reopened 30-year bond auction sizes starting in August.
The table below presents the anticipated auction sizes (in $ billon) for the upcoming quarter; of note, the schedule exceeds that TBAC's recommendations, suggesting a mismatch with primary dealers:
In total, the Treasury expects that over the three months through October, it will ramp up nominal coupon issuance by a total of $132 billion compared with the previous quarter; it also intends to increase auction sizes across all nominal coupon tenors over the August-October quarter, with larger increases in longer tenors (7-year, 10-year, 20-year, and 30-year). Treasury also intends to modestly increase auction sizes for FRNs while leaving auction sizes for TIPS unchanged.
over the July-September quarter, Treasury anticipates borrowing to be $947 billion (compared to the $2.753 trillion of realized borrowing in the April-June quarter). The July-September borrowing need will ultimately depend on the final provisions of the additional legislation.
As we covered extensively, the Treasury more than doubled the issuance of T-bills outstanding earlier this year as it rushed to finance a record stimulus program approved by Congress; it is now seeking to gradually roll much of this debt into coupons. Furthermore, as noted on Monday, the Treasury has also gathered an unprecedented hoard of cash, partly in preparation for loan forgiveness to small businesses under that earlier virus-relief program.
The Treasury was expected to continue meeting the large US financing needs via increased bill issuance, however, the Treasury made it clear it will shift financing from bills to longer-dated tenors over the coming quarters; some were expecting the announcement (or at least discussion) of a new bills maturity (analysts speculated either a 4-, 5- or 9-month tenor)
Among the changes announced Wednesday, courtesy of Bloomberg:
- “Increases of $6 billion to both the new and reopened 10-year note auction sizes, and increases of $4 billion to both the new and reopened 30-year bond auction sizes starting in August”
- “Increases of $5 billion to both the new and reopened 20-year bond auction sizes starting in August”
- Floating rate note sales will also be increased
- “Treasury will continue to shift financing from bills to longer-dated tenors over the coming quarters, using long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility,” the department said in a statement Wednesday.
- With another stimulus package looming, uncertainties remain over the exact funding needs in coming months. On Monday, the Treasury said it expected to raise $947 billion in debt over the three months through September, and another $1.216 trillion in net marketable debt in the final three months of 2020.
In response to the news, the Treasury curve modestly steepened, with the 10 and 30Ys about 4bps wider over the past 24 hours.
The bottom line: with Treasury yields plumbing all time lows, it is only reasonable that the US Treasury will flood the market with as much new debt as it can handle... and then some. And as long as yields keep sliding (thanks to the Fed monetizing virtually all gross issuance), the Treasury will keep increasing its auction sizes until one day it hits the tipping point.