The Treasury has published details of its quarterly refunding and subsequent Treasury auctions, and as previewed earlier, it kept sales of longer-term debt steady for the third straight time, in line with dealers’ forecasts, while unexpectedly announcing a new program to buyback older securities, starting sometime in 2024. According to some, a buyback program is not that different from QE as it injects liquidity into the system at regular intervals.
Subject to the ongoing limitations of the debt ceiling, the Treasury kept new issuance unchanged; It announced it would offer $96 billion of Treasury securities to refund approximately $75.2 billion in notes maturing on May 15, 2023. This issuance will raise new cash from private investors of approximately $20.8 billion. The securities are:
- A 3-year note in the amount of $40 billion, issued on May 9 and maturing May 15, 2026;
- A 10-year note in the amount of $35 billion, issued on May 10 and maturing May 15, 2033; and
- A 30-year bond in the amount of $21 billion, issued on May 11 and maturing May 15, 2053.
The balance of Treasury financing requirements over the quarter will be met with regular weekly bill auctions, cash management bills (CMBs), and monthly note, bond, Treasury Inflation-Protected Securities (TIPS), and 2-year Floating Rate Note (FRN) auctions.
The Treasury said it believes that current issuance sizes leave it well-positioned for its near-term borrowing needs, and so intends to keep nominal coupon and FRN new issue and reopening auction sizes unchanged during the May 2023 – July 2023 quarter, which are shown in the table below.
Yet with tax receipts far below expectations (which will lead to an earlier debt ceiling X-date) and the budget deficit widening as the Fed shrinks its holdings of Treasuries, US debt managers widely anticipated a surge in issuance of longer-term securities later in the year, something which the Treasury's latest debt borrowing estimates strongly hinted at, by anticipating $1.45 trillion in borrowing needs for the April-September period.
The Treasury Department said Wednesday that may happen as soon as August — an earlier timeframe than many dealers thought, to wit: "based on projected intermediate- to long-term borrowing needs, Treasury may need to modestly increase auction sizes later this year, potentially as soon as the August 2023 refunding announcement."
Sales plans for Treasury Inflation-Protected Securities, or TIPS, were also kept unchanged compared with sizes over the prior quarter. But the Treasury added that it will “continue to monitor TIPS market conditions and consider whether modest increases would be appropriate in future quarters.”
The Treasury also addressed the elephant in the room, namely the looming debt ceiling crisis, noting that as Yellen outlined in her recent letter to Congress, "our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time."
In keeping with the spirit of newfound spirit of fearmongering, the Treasury said that while "It is impossible to predict with certainty the exact date when Treasury will be unable to pay the government’s bills, and Treasury will continue to update Congress in the coming weeks as more information becomes available" given the current (very loose) projections, "it is imperative that Congress act as soon as possible to increase or suspend the debt limit in a way that provides longer-term certainty that the government will continue to make its payments."
Bottom line: "Until the debt limit is suspended or increased, debt limit-related constraints will lead to greater-than-normal variability in benchmark bill issuance and significant usage of CMBs." As a reminder, a high-stakes summit is now planned for May 9 between Joe Biden and top congressional leaders on the debt limit.
With the Treasury constrained by the debt limit, reduced issuance of T-bills has seen them drift near the lower end of the 15% to 20% share of total debt recommended by the Treasury Borrowing Advisory Committee, or TBAC.
However, once the debt ceiling is resolved - and it will be one way or another, but most likely only after there has been some "market shock" event - dealers see a deluge of new bill sales coming in the months following. Keeping it below the 20% mark is one reason dealers have been expecting increased issuance of coupon-bearing debt. Many had anticipated that starting in November, with a smaller number projecting August, as the Treasury rebuilds its cash balance, a move which will result in a big drain of liquidity from the market.
Strategists at TD Securities predict that Treasury will issue nearly $900 billion of bills by the end of fiscal year on Sept. 30. They also assume an increase in the debt ceiling will come in July, and forecast even more net bill issuance in the next fiscal year to help normalize the supply-demand imbalance at the front-end of the yield curve.
But much more importantly, the Treasury announced that, after months of consideration, it’s kicking off a buyback program in the calendar year 2024. By buying back older securities and issuing more of the current benchmarks, one aim is to help bolster patchy liquidity in the Treasuries market. The program could also help the department to smooth out volatility in its issuance of Treasury bills as it manages its cash balance. We previewed this last October in "The Market Is About To Be Shocked With A "Treasury Buyback" Operation Twist." Seven months later it's now a fact.
"Based on feedback from a broad variety of market participants, including the Treasury Borrowing Advisory Committee and primary dealers, Treasury believes it would be beneficial to conduct regular buyback operations for cash management and liquidity support purposes" the Treasury said in the refunding statement.
“Treasury anticipates designing a buyback program that will be conducted in a regular and predictable manner, initially sized conservatively,” the statement said. The program is “not intended to meaningfully change the overall maturity profile of marketable debt outstanding,” it added, but of course, what the market will read here is that the Treasury just launched its own version of QE, at least until the Fed joins the fun after the next market crash.
As detailed in the TBAC's presentation, the Treasury buyback program would focus on two debt management objectives:
- Liquidity Support: in order to bolster market liquidity, including by establishing a predictable opportunity for market participants to sell off-the-run securities
- Cash Management: in order to reduce volatility in Treasury’s cash balance and bill issuance
In terms of buyback parameters, the TBAC laid out the following:
- Liquidity Support: include nominal coupon and TIPS securities with maturities across the curve. 6-8 purchase buckets by tenor would allow 1-2 operations in each bucket each quarter with operations around once per week
- Cash Management: likely focused on off-the run nominal coupon and TIPS securities with short maturities
The Treasury said that further details on the buyback - the first such program in about two decades - will be unveiled in future quarterly refunding announcements, with more consultation to come with market participants.
There were much more details in the May 2 TBAC Minutes, in which debt manager Kyle Lee noted Treasury believes a buyback program should focus on liquidity support and cash management objectives, and operations should be regular and predictable across tenors, “not be used to fundamentally change the overall maturity profile of total debt outstanding, and not be used to mitigate episodes of acute market stress”
The presentation noted Treasury agrees with TBAC’s suggestions on initial buyback sizes, noted it would be important for Treasury to be flexible with buyback amounts based on market conditions and prices; Lee said Treasury also believes buybacks should be treated like any other cash outlay for debt management purposes, and given the size of the buybacks being considered, “should not meaningfully impact the overall maturity profile of total debt outstanding."
Lee said there are “several outstanding issues that Treasury is still considering” among which:
- Primary dealers split on whether $5 billion to $10 billion per month would “meaningfully improve liquidity” as some thought the signal of Treasury’s willingness to conduct buybacks for liquidity support would improve investor confidence and liquidity. Others thought Treasury would need to also indicate a large size to assure investors
- Dealers also noted some difficulties sourcing short coupons given supply and demand imbalances in the front-end, while others said investor preferences for bills over short coupons would enable Treasury to conduct larger buybacks in short coupons (hence the "Operation Twist" we previewed late last year)
The TBAC committee also discussed whether to change the auction schedule for the 2-, 3-, 5-, and 7-year notes from monthly new issues to a schedule of one new issue and two reopening auctions per quarter.
The presenting member noted initial analysis indicated that fewer and larger issues could lead to improvements in Treasury market liquidity; he said the Treasury should consider a staggered approach to ensure that at least one tenor matures each month.
Ultimately, Lee recommended maintaining the monthly new issue cadence for the 2-year, which market participants find valuable. TBAC members discussed different potential auction, repo, and secondary market trading dynamics of monthly versus quarterly issues and concluded that further study was warranted
The full TBAC presentation on "buybacks as a policy tool" is below (pdf link)