Yields Surge After Treasury Announces Record $96BN In Treasury Refunding, Launches 20-Year Coupon Bond

Two days after the Treasury announced it would sell a record $3 trillion (sorry, $2.999 trillion) in debt in the current quarter...

... moments ago we got the details of what the upcoming helicopter money takeoff will look like when the Treasury issued its quarterly refunding announcement.

Here is the big picture summary:

The Treasury will boost long-term refunding debt sales next week to a record $96 billion to refund approximately $57 billion of privately-held Treasury notes and bonds maturing on May 15, 2020, and raising $39 billion in new cash:

  • Treasury to sell $42BN of 3-year notes on May 11, in line with the $42BN estimate
  • Treasury to sell $32BN of 10-year notes on May 12, greater than the $29BN estimate
  • Treasury to sell $20BN of 20-year bonds on May 20, greater than the $15BN estimate
  • Treasury to sell $22BN of 30-year bonds on May 13, greater than the $20BN estimate

Total combined sales of $96BN for the three maturities is a big jump from the $84BN last quarter, a level that had held for the past five quarters. 

  • As noted previously, the Treasury is launching a 20-year bond for the first time since the 1980s for $20BN (Exp. 15BN).
  • Exploring the possibility of issuing a floating rate SOFR-linked issue
  • Intends to mostly increase auction sizes for FRN, TIPS to remain unchanged
  • Treasury expects to begin to shift financing from bills to longer-dated tenors over the coming quarters

More details:

NOMINAL COUPON AND FRN FINANCING

Over the next three months, Treasury anticipates increasing the sizes of the 2-, 3-, and 5-year note auctions by $2 billion per month.  As a result, the size of 2-, 3-, and 5-year note auctions will each increase by $6 billion by the end of July. Treasury also anticipates increases in the auction sizes of 7-year notes of $3 billion per month over the next 3 months.  The size of the 7-year note auction will increase by $9 billion by the end of July.

Treasury is also announcing increases of $5 billion to both the new and reopened 10-year note auction sizes, and increases of $3 billion to both the new and reopened 30-year bond auction sizes starting in May.

In addition, following the $2 billion increase in the April new-issue FRN auction size, the May and June FRN reopening sizes will be increased by $2 billion (resulting in a $20 billion auction size for each).  Treasury anticipates that it will increase the size of the next new-issue 2-year FRN auction in July by $2 billion to $24 billion.

INTRODUCTION OF A 20-YEAR NOMINAL COUPON BOND

The treasury it also announced the first issuance of 20-year bonds since the mid-1980s which will take place on May 20 and will amount to $20 billion. As outlined in the previous refunding statement, the security will have a dated date of May 15, 2020, and the maturity date will be May 15, 2040.  The security will settle on Monday, June 1, 2020, because May 31, 2020, is a Sunday. The Treasury anticipates reopening the 20-year bond in both June and July in amounts of $17 billion for each auction.  This security will raise an additional $54 billion in new cash over the quarter.  Additional details for the auction of the 20-year bond offering will be announced on Thursday, May 14, 2020 at 11:00 a.m. EDT.

The Treasury also said it will increase other maturities with a focus on longer-dated debt, over the quarter.

The anticipated changes in auction sizes are presented in the table below:

Some more details from Bloomberg;

  • Treasury laid out plans to increase all other nominal debt securities and floating-rate notes over the quarter, leaning more heavily on longer-dated securites. It will leave inflation-linked debt sales unchanged
    • The increase in coupon issuance will be larger in longer tenors (7-, 10-, 20-, 30-year), over the May-to-July quarter
    • Treasury anticipates increasing the sizes of the 2-, 3-, and 5-year note auctions by $2 billion per month
    • Treasury also anticipates increasing the auction sizes of 7-year notes by $3 billion per month over the next 3 months
    • Treasury also announced increases of $5 billion to both the new and reopened 10-year note auction sizes, and increases of $3 billion to both the new and reopened 30-year bond auction sizes starting in May
    • After the $2 billion increase in the April new-issue FRN auction size, the May and June FRN reopening sizes will be increased by $2 billion
  • Treasury plans to continue to supplement bill issuance with cash management bills
  • Treasury said it continues to explore issuance of a floating-rate note indexed to SOFR
  • Department expects to issue a request for information this month on the topic

While the refunding amount was well higher than expected, it clearly isn't enough to bridge the surge to $3 trillion in issuance this quarter alone. As such, the Treasury also announced that over the upcoming quarter, Treasury will continue to supplement its regular benchmark bill financing with a regular cadence of CMBs.  Treasury anticipates that weekly issuance of 6- and 17-week CMBs for Thursday settlement and maturity as well as 15- and 22-week CMBs for Tuesday settlement and maturity will continue at least through the end of July.  It is anticipated that these CMBs will be announced as part of the regular Tuesday and Thursday bill announcement cycle.

TIPS FINANCING

Over the next refunding quarter, Treasury expects to maintain TIPS issuance sizes at $12 billion for the May 10-year TIPS reopening, $15 billion for the June 5-year TIPS reopening, and $14 billion for the July 10-year TIPS. Treasury will continue to closely monitor TIPS market conditions and assess supply and demand dynamics when considering how best to meet future financing needs.

TREASURY PLANS TO ISSUE A REQUEST FOR INFORMATION (RFI) ON SOFR-INDEXED FRNS

Treasury continues to explore the possibility of issuing a floating rate note indexed to the Secured Overnight Financing Rate (SOFR).  As noted in the February 2020 quarterly refunding announcement, Treasury plans to issue an RFI to further our understanding of potential demand for such a security and how it might fit into Treasury’s goal of financing the government at the least cost over time.  Treasury expects to release the RFI in May 2020 and encourages market participants and the public to respond.

PROJECTED FINANCING NEEDS

Treasury’s borrowing needs have increased substantially as a result of the federal government’s response to the COVID-19 outbreak.  Since the end of March, Treasury has raised an unprecedented $1.464 trillion on net and the Treasury cash balance has reached historically high levels.  Over the next quarter, Treasury’s cash balance will likely remain elevated as Treasury seeks to maintain prudent liquidity in light of the size and relative uncertainty of COVID-19-related outflows.

While the initial increases in financing related to the COVID-19 outbreak response were focused on Treasury bills, Treasury expects to begin to shift financing from bills to longer-dated tenors over the coming quarters.  In light of the substantial increase in borrowing needs, Treasury plans to increase its long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility.

FINANCING NEEDS FOR THE UPCOMING QUARTER

Based on current fiscal forecasts, Treasury intends to increase auction sizes across all nominal coupon tenors over the May-to-July quarter.  The increase in coupon issuance will be larger in longer tenors (7-year, 10-year, 20-year, and 30-year).  Treasury also intends to modestly increase auction sizes for floating-rate notes (FRNs).  Meanwhile, auction sizes for TIPS will remain unchanged.

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.

Below was lay out the TBAC's recommended Treasury financing scheduled for Q2 2020...

... and Q3 2020:

* * *

While the market had expected an increase in issuance amounts ahead of the announcement, the size of issuance has exceeded expectations across virtually every tenor, and the result was a spike in 10Y yields as bond traders start to evaluate just how realistic it is to have a deluge of helicopter money supply at 0.65%.

And judging by the puke in Treasuries, we now sit back and wait for the Fed to announce QE whatever number it is now on, where they will monetize all these trillions in new bonds.