The US Treasury said on Wednesday, just hours before the Fed unveils its balance sheet-busting Quantitative Tightening, that it trimmed its quarterly sale of longer-term debt for a third straight quarter (with the largest cuts coming in the seven-year and 20-year maturities) and also warned that it may make further reductions, citing “strong” federal tax revenues.
The Treasury said it was trimming issuance by smaller increments than in previous quarters based on projected funding needs that include strong tax receipts and potential redemptions of Treasury securities as par tof the Fed's QT.
Specifically, the Treasury announces refunding debt sales next week totaling $103BN, down $7BN from $110BN in February, to refund approximately $47.8 billion of privately-held Treasury notes maturing on May 15, 2022 and plans to reduce sizes for all fixed-rate nominal auctions during the quarter. This marks the longest string of quarterly cuts since a 2014-2015 cycle. In a surprise for some dealers, it’s also trimming sales of two-year, three-year and five-year auctions in coming months (see below). The refunding issuance will raise new cash of approximately $55.2 billion; the details are as follows:
- Treasury to sell $45b of 3-year notes on May 10, down $5BN from the Feb refunding
- Treasury to sell $36b of 10-year notes on May 11, down $1BN from the Feb refunding
- Treasury to sell $22b of 30-year bonds on May 12, the same amount as the Feb refunding.
Next week's $103BN refunding is the smallest since May 2020, and compares with a peak of $126BN first reached in February 2021; auction sizes across the curve began rising in 2018 to finance tax cuts and surged in 2020 to finance federal pandemic response
Over the next three months, the Treasury anticipates incrementally reducing the size of each of the 2-, 3-, and 5-year note auctions by $1 billion per month. As a result, the size of the 2-, 3-, and 5-year note auctions will each decrease by $3 billion by the end of July. Treasury also anticipates reducing the size of the 7-year note auction by $2 billion per month. As a result, the size of the 7-year note auction will decrease by $6 billion by the end of July. Treasury also anticipates decreases of $1 billion to both the new and reopened 10-year note auction sizes and to the new and reopened 30-year bond auction sizes starting in May. Treasury also anticipates decreases of $2 billion to both the new and reopened 20-year bond auction sizes starting in May. For the 20-year bond, Treasury announced sizes of $17b/$14b/$14b for new issue and reopenings; dealer estimates ranged from unchanged ($19b/$16b/$16b) to as low as $15b/$12b/$12b over May, June and July. In addition, Treasury anticipates maintaining the May and June reopening 2-year FRN auction sizes and maintaining the July new issue 2-year FRN auction size.
Separately, changes in nominal and FRN auction sizes will reduce issuance to private investors by $69b compared to the previous quarter. TIPS auctions during the quarter will include a $14b 10-year reopening in May, an $18b 5-year reopening in June and a $17b 10-year new issue in July. The June 5-year TIPS reopening and the July 10-year TIPS new issue will each increase by $1BN.
“Given Treasury’s desire to stabilize the share of TIPS as a percent of total marketable debt outstanding and continued robust demand, Treasury will continue to monitor TIPS market conditions and consider whether subsequent modest increases would be appropriate,” Treasury says.
The Treasury said on Monday it expects to pay down $26 billion in debt the second quarter, down from a January borrowing estimate of $66 billion, primarily because of an increase in receipts. The second-quarter estimate assumes an end-of-June cash balance of $800 billion.
As Bloomberg notes, dealers had widely expected the reduction to next week’s sale of notes and bonds, but viewed it as likely to be the last cutback ahead of the Federal Reserve’s move to shrink its $5.8 trillion stockpile of Treasuries. The Fed is forecast to unveil its bond-portfolio runoff plan later on Wednesday, and that process was seen forcing the Treasury to have to sell more debt to the public.
The U.S. government had increased auction sizes in 2020 to pay for coronavirus-related spending; however, since November 2021, Treasury has made substantial progress towards aligning issuance with intermediate-term borrowing needs by reducing auction sizes across all nominal coupon securities. During this period, it said it "also received important information regarding Treasury’s projected borrowing needs, most notably recent strong tax receipts and public communications from the Federal Open Market Committee regarding potential redemptions of Treasury securities from the Federal Reserve System Open Market Account (SOMA)."
Based on this updated information, "Treasury intends to continue reducing auction sizes of nominal coupon securities during the upcoming May – July 2022 quarter, though by smaller increments than in previous quarters. While the issuance plans announced today leave Treasury well positioned to finance additional privately-held net marketable borrowing needs resulting from potential SOMA redemptions and to address potential changes to the fiscal outlook, additional reductions in future quarters may be necessary depending on future developments in projected borrowing needs", the Treasury said, referring to the Fed's intention to stop rolling over all of the maturing Treasury securities in its System Open Market Account
Treasury plans to address any seasonal or unexpected variations in borrowing needs over the next quarter through changes in regular bill auction sizes and/or CMBs.
There was another surprise announcement: regarding bills, the Treasury said it plans to change the 4-month cash management bill into a weekly benchmark offering, with details to be provided at the August refunding announcement. Some more details:
Given the outlook for T-bill supply over the intermediate to long term and after gathering feedback from a variety of market participants, including the primary dealers and the Treasury Borrowing Advisory Committee, later this year Treasury intends to change the 4-month (i.e., 17-week) CMB into a benchmark bill (part of the regular weekly bill issuance schedule going forward). Investor reception to the 4-month CMB has been strong, and elevation to benchmark status will further support demand.
Over the coming months, Treasury plans to make necessary operational and systems changes in order to smoothly transition the 4-month CMB to benchmark status. During this transition, Treasury will continue to issue the 4-month CMB at a regular cadence. Treasury also intends to maintain the Tuesday settlement and maturity cycle when the 4-month CMB becomes a benchmark bill. Additional implementation details, including the likely timing of the first benchmark auction, will be provided at the August quarterly refunding.
Looking ahead, the Treasury made two preview announcement: i) it intends to issue in the coming months a request for information about possible steps to improve transparency for secondary market transactions in its securities and encourages market participants and the broader public to respond; and ii) the Treasury is planning amendments to auction regulations in coming months, including an increase in the non- competitive bidding and award limits for all securities to $10MM from $5MM in light of growth in auction sizes.
Separately, the minutes of the all-important Treasury Borrowing Advisory Committee (TBAC) latest meeting indicated the following:
- In light of the strength in federal tax receipts, as well as the prospect for Federal Reserve balance sheet reductions, the Committee recommended that Treasury should continue with coupon auction size reductions across tenors during the upcoming refunding quarter, with slightly larger reductions in the 7-year note and 20-year bond, but at a slower pace than cuts announced in November and February
- They noted reductions to nominal coupon issuance would likely maintain the share of bills within, but toward the lower end of, its recommended 15%-20% range over time
- Committee emphasized the need for Treasury to remain nimble in its debt management decisions, given the ongoing uncertainty in borrowing needs
- Also said the strength in receipts should be monitored to determine if it is “more of an anomaly or a trend that could warrant additional cut to coupons in the subsequent quarters”
- Committee heard a presentation on Treasury market trading conditions since the beginning of the year and how evolving inflation and monetary policy expectations, as well as heightened geopolitical tensions affected market volatility and liquidity
- Presenting member stated that while liquidity conditions since the beginning of the year appeared worse based on some metrics, other metrics showed no significant deterioration, and funding markets were functioning properly and weren’t a factor in strained liquidity conditions
- Lower liquidity was largely due to elevated volatility as a result of the elevated uncertainty around the inflation, monetary policy, and geopolitical outlook
- Committee then discussed the presentation, with several members noting that liquidity conditions could also be affected by the Federal Reserve’s balance sheet reduction
- TBAC then turned to a presentation on the four-month, or 17-week cash management bill (CMB)
- Presenting member noted that Treasury should take into account the trajectory of future bill issuance, current and future demand for the 4-month CMB compared to benchmark bills, and whether this benchmark offering would complement the current debt management process
- Based on the projected growth in bill issuance in the longer term, strong expected future demand, and the compatibility of the 4-month bill issuance patterns and maturities for both investors and Treasury, the presenting member recommended that Treasury should consider moving the 4-month CMB to benchmark status
- The Committee unanimously supported the recommendation to make the 4-month bill a benchmark tenor
In response to the Refunding announcement, Treasuries did, well... nothing, holding on to gains across belly and long-end of the curve.
The 5s30s curve was around -2.2bp, remaining flatter by 0.7bp on the day, while 2s10s spread extends flattening slightly to 3bp tighter on the day. U.S. yields remain ~1bp richer across long-end of the curve with front-end underperforming, with 2- year yields cheaper by ~3bp on the day. In the long-end the 10s20s30s fly is steady around 45bp, little changed on the day after the refunding announcement.