As highlighted in our preview, and as the Treasury itself noted in its last refunding announcement, moments ago the latest Treasury Quarterly Refunding announcement confirmed that it is indeed boosting the size of its quarterly issuance of long-term debt for a third straight time - rising to $121 billion, just as consensus expected - and said that it "does not anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters."
Specifically, the Treasury Department it will sell $121 billion of bonds at its quarterly refunding auctions next week, which span 3-, 10- and 30-year Treasuries, which is in line with what most analysts had expected, and echoed the cadence of increases unveiled at the last refunding, in November. The breakdown of next week’s refunding auctions is as follows:
- $54 billion of 3-year notes on Feb. 6, up from $52BN in Jan
- $42 billion of 10-year notes on Feb. 7, up from $37BN in Jan
- $25 billion of 30-year bonds on Feb. 8, up from $21BN in Jan
Treasury plans to increase the auction sizes of the 2- and 5-year by $3 billion per month, the 3-year by $2 billion per month, and the 7-year by $1 billion per month. As a result, the auction sizes of the 2-, 3-, 5-, and 7-year will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of April 2024. Treasury plans to also increase both the new issue and the reopening auction size of the 10-year note by $2 billion and the 30-year bond by $1 billion. Treasury plans to maintain the 20-year bond new issue and reopening auction size.
As for Treasury Inflation-Protected Securities, or TIPS, the department said it will maintain the February 30-year maturity sale at $9 billion and then increase the April 5-year maturity TIPS to $23 billion. It also said it will boost the March reopening of the 10-year maturity to $16 billion. Turning to floating-rate notes, the Treasury plans to increase the February and March reopening auction size of the 2-year FRN by $2 billion to $28BN and the April new issue auction size by $2 billion.
All other nominal coupon-bearing debt was increased by the same cadence as in November, except for the 20-year bond, which was kept steady.
The full summary is below:
More importantly, the department said that unlike three months ago when it predicted more coupon size increased, "based on current projected borrowing needs, Treasury does not anticipate needing to make any further increases in nominal coupon or floating-rate note auction sizes, beyond those being announced today, for at least the next several quarters." Of course, with the Biden fiscal stimulus firehose on full blast ahead of the November elections, we expect this number to be revised materially higher in one quarter.
Relief from further boosts to auction sizes for longer-term securities may help support demand for Treasuries. Investors for several months now have been particularly sensitive to news on the overall supply of federal debt, at a time when the Federal Reserve has been steadily shrinking its own holdings of US securities.
The Treasury also said Wednesday that it will announce the start-date for its new buyback program in the May refunding announcement, after conducting some small-value operations in April. That program is designed to help the department with its cash management and to improve liquidity for non-benchmark debt. Here is the relevant section:
In preparation for the implementation of a regular buyback program later this year, Treasury anticipates conducting several small-value buyback operations in April with a limited population of securities to test processes and infrastructure. Details about these small-value buybacks will be released at a later date. Treasury intends to announce the date of the first regular buyback operation at the May refunding.
Turning to the all-important Bills, which the Treasury used to fund much of the budget deficit in late 2023 when it funded deficit spending using the Revere Repo drain (whose proceeds were used to fund Bill issuance), the Treasury said it “expects to maintain bill auction sizes at current levels into late-March,” with modest reductions by then into early April, during the tax-filing season.
The Treasury anticipates that this will result in a $300-350 billion net increase to Bill supply over the next two months. By late-March or early-April, Treasury anticipates modestly reducing short-dated bill auction sizes going into the tax filing season. These reductions will likely lead to a $100-150 billion net reduction to privately-held supply during the month of April, which is also when the Reverse Repo is expected to be mostly drained.
Before Wednesday’s announcement, most dealers assumed that the Treasury would cut back issuance of bills — which mature in a year or less — if the department found itself in the quarters ahead with reduced borrowing needs. That’s after debt managers relied heavily on bills in recent months, with their share of total debt exceeding the 15% to 20% range the Treasury Borrowing Advisory Committee, a panel of market participants, has long recommended.
A less cheerful perspective came from the Treasury Borrowing Advisory Committee which said it may need to weigh incremental coupon boosts, noting that it was comfortable recommending auction size increase for just the current quarter, despite what will be a sustained higher T-bill share in coming quarters.
The committee said in a letter to Treasury Secretary Janet Yellen it recognizes it may be appropriate over time to consider incremental increases in coupon issuance depending on how the current uncertainty regarding borrowing needs evolves.
- Good discussion among members as to the many factors that are likely to impact borrowing needs relative to expectations, which include evolution of Fed monetary policy — including SOMA portfolio redemptions and investments — changes in the fiscal outlook as it relates to economic growth and tax receipts
- TBAC said dealers reflected the increased market focus on the dynamics in the very front end, both as reserves move from an abundant to an ample regime, and as Fed officials began discussing the tapering of Quantitative Tightening, or QT
- Some market participants expected a taper to start this spring and conclude in the fall of 2024 as economic weakness would drive rate cuts this year
- However, some participants expect QT to persist until an ample level of reserves is reached, even in the presence of rate cuts
- Committee said similarly distributed views on “natural plateauing of the RRP,” with most expecting a run down to zero, but some looking for a sustained low level of reserves there, in the $200 billion to $300 billion range. “Both of these factors were thought by the Committee to be important components of support for T-bills in 2024,” they wrote
- TBAC reviewed the drivers of investor preference for the Treasury futures versus cash market, often referred to as “the basis”
- Agreement among members that leveraged funds’ futures open interest was largely driven by intermediating Treasury purchases for the asset manager community
- Committee largely felt that the dynamics driving the basis trade could be better understood and appreciated the opportunity to address that with this charge
- The charge found that there could be metrics worth monitoring, specifically, with the advent of required repo clearing, there will be an opportunity to gather better data on exposures and leverage
- In essence, Treasury futures open interest is more a function of asset manager view on credit valuations than their view on Treasury valuations themselves
Finally, while price action remained broadly steady, the Treasury curve has pushed to fresh wides of the day after Treasury announced increases to all nominal auction sizes except 20-year. The increases across tenors were broadly inline with bank expectations. On the day 2s10s, 5s30s spreads steeper by 2bp and 3.5bp, remain near wides of the day in the aftermath of the refunding announcement; 10-year yields ease slightly lower, remain richer by 3bp on the day.
In short, unlike the last two QRAs, the first of which sparked a powerful bond selloff and the second, a rally, this one may have been Goldilocks, and was largely in line with expectations.