Treasury Increases Auction Sizes To Fund Soaring Deficit; Launches 2-Month Bill

While traditionally a snoozer, this morning's Treasury's refunding announcement was closely watched for details on how the US Treasury's plans to fund its soaring budget deficit in the coming quarters, shortly after it announced it had sold a near record $488BN in debt in the last quarter. Specifically, bond traders were looking at how much upcoming auctions would increase by, and whether the Treasury would also introduce a 2 Month bill auction as some strategists had expected.

Well, the Treasury did all that and more, revealing that it would sell $31BN in 3Y notes on May 8, a $5BN increase vs the $26BN sold last quarter; additionally, the 10Y refunding auction on May 9 will also increase by $1BN to $25BN vs $24BN last quarter, and a similar increase for the 30Y auction, which would increase to $17BN on May 10 vs $16BN last quarter.

That was just the beginning: among the other debt-busting details revealed today were the following 

  • Treasury to introduce two-month bill later this year
  • Keeps TIPs auctions unchanged, evaluates new five- year TIPs sale
  • 2-, 3-year note auctions to rise by $1 bln per month
  • Boosts 5-, 7-, 10-, 30-year debt auctions by $1b
  • Floating-rate note auctions boosted by $1 bln

In total, these adjustments will result in an additional $27 billion of new issuance for the upcoming quarter.  The good news for bond bulls is that the nominal coupon and FRN auction size increases are smaller than the total increases of $42 billion announced in January 2018 for the months of February through April 2018.

Some more details on rising auctions:

Based on our current forecast, Treasury is announcing additional modest increases to nominal coupon and FRN auction sizes over the upcoming quarter.  Over the next three months, Treasury anticipates increasing the sizes of the 2- and 3-year note auctions by $1 billion per month.  As a result, the size of 2- and 3-year note auctions will each increase by $3 billion by the end of July.  In addition, Treasury will increase the auction size of the next 2-year FRN auction by $1 billion in May.  Finally, Treasury will increase auction sizes by $1 billion for each of the next 5-, 7-, and 10-year notes and the 30-year bond auctions in May.  All changes are applicable to subsequent new issues and reopenings. 

Meanwhile, the Treasury notes that T-Bill supply, which many said was the driver behind the Libor-OIS surge, will moderate in the coming months:

Aggregate bill supply, which peaked in late March in response to elevated borrowing needs, including seasonal factors and Treasury’s efforts to rebuild cash balances consistent with our stated cash balance policy, is expected to decrease modestly over the remainder of the fiscal year, barring any substantial, unexpected changes in financing needs.  

The Treasury summarizes that the "balance of Treasury financing requirements will be met with the weekly bill auctions, cash management bills, the monthly note and bond auctions, the May 10-year Treasury Inflation-Protected Securities (TIPS) reopening auction, the June 30-year TIPS reopening auction, the July 10-year TIPS auction, and the regular monthly 2-year Floating Rate Note (FRN) auctions."

Fast forwarding to the key development, the introduction of the 2-Month Bill. Here are the details:

Treasury intends to introduce a new 2-month bill later this calendar year. Treasury has had extensive discussions about the benefits of a 2-month bill offering with a variety of market participants, including the Treasury Borrowing Advisory Committee (TBAC).  Our analysis suggests that this new product will meet the needs of many investors, while also enhancing Treasury cash management, reducing operational risks, and helping us in our mission to fund the government at the least cost over time.

In the coming months, Treasury will further study operational details related to offering the 2-month bill for settlement on a date different from the traditional Thursday settlement date for Treasury bills, such as Tuesday.  Treasury will explore alternative ways to enhance liquidity of the 2-month bill, if it is offered on a different settlement date, such as moving the settlement date of an existing bill tenor so that it aligns with the settlement date of the 2-month bill.    

We wonder if the next blow out in 3M USD Libor, which JPM recently predicted would reach as high as 2.90% will be blamed on the 2M Bill.

* * *

Separately, the Treasury Borrowing Advisory Committee said at its May 1 meeting that a 2 Month Treasury bill could be introduced to fill government funding gap “based on evidence for strong short-demand,” according to the meeting minutes.

As Bloomberg notes, the TBAC agreed the amount of net bill issuance should increase given the CBO’s projections for increased borrowing needs “over the next several years.” It also said that a further study was warranted to assess a Tuesday settlement cycle to reduce congestion an increase “operational resiliency”

Reinforcing the need for a 2-month bill, the TBAC said this introduction would allow for smaller auction sizes in other tenors, “allowing for greater flexibility in funding future projected financing gaps.” Of course, it would also mean greater cumulative Bill issuance, and even more flattening pressure.

An analysis was presented at meeting that showed the persistence of a “bill issuance premium,” which tends to be tthe greatest at the short-end of the curve, “thereby supporting the idea of increasing issuance in that sector”

Academic research previously present to TBAC suggested that Treasury should consider issuing more bills given the existence of a T-bill premium. This premium seems to be especially large at the front-end of the bill curve, suggesting there may be unmet investor demand at these tenors. The premium is estimated by comparing actual historical T-Bill yields to a fitted yield curve calculated from off-the-run USTs.

The committee agreed recent increases in broader money market rates due to confluence of factors, including but not limited to bill issuance, and also remarked that restoring cash buffer is a prudent policy objective.

The TBAC's conclusion:

  • Observed congestion around the current auction cycle creates capacity and potential operational risk.
  • This committee has previously recommended 25% to 33% of the financing gap to be funded with T-Bills. This is projected to significantly increase T-Bill auction sizes.
  • Heavy settlement volumes on Thursday has a negative impact on funding markets and increases Treasury’s concentration of funding risk.
  • Introducing a 2m point at a new settlement date can alleviate both problems – reducing supply per issue and per day.
  • TBAC recommends introducing an 8 week bill to settle on Tuesdays.
  • TBAC further recommends moving the 4 week bill settlement to Tuesdays as well, as a way to further reduce settlement concentration and increase liquidity in the 8 week bill.
  • 13-, 26- and 52-week bills should remain on the Thursday cycle.
  • This will increase the bill sector to 52 cusips from the current 44.
  • There is sufficient liquidity in extremely short e

More in the full minutes (link), while the full 2-Month Bill presentation is below (link).


FireBrander hedgeless_horseman Wed, 05/02/2018 - 09:13 Permalink

It's the Libtards fault!

If we could get Republicans in charge of the House and the Senate, and then turbo charge that with a Republican President, then we could really get our Nations' business in proper order!

If only we had that Trifecta!

> Repeal ObamaCare and install a Free Market based Health System!
> Scale back the welfare state!
> Secure our borders and implement a rational/beneficial immigration/work-permit system.
> Balance the Federal Budget and implement a long term debt reduction plan.
> The list is endless!

If only, if only, we could get Republicans in full control...Dream Big and Dream Often!


Geesh, first vote a down vote? Really, that's my best sarcasm, is it really that bad or are you just sarcastically challenged?

In reply to by hedgeless_horseman

Alexander De Large FireBrander Wed, 05/02/2018 - 09:36 Permalink

Only stupid people who cannot grasp sarcasm and/or are too dense to present a counterargument down vote comments.

I don't even understand the down vote.  Repubs have all the juice and nothing is getting done, so who's fault is it?

All that "personal responsibility" horseshit and guys won't even be accountable for their own governmental failures.

Praise God.

In reply to by FireBrander

Conscious Reviver FireBrander Wed, 05/02/2018 - 09:37 Permalink

That which can not be sustained will not be. So the DC system will crash ...

Re. First down vote. Hold on, I'm splaining.

The thing is, as admirable as all your points are I think you grossly under estimate the difficulty. Not about the elect Republicans part. That could happen. But it won't change any thing.

Can't you see how these shape-shifting chameleons operate already? By now?

Until DC collapses under the weight of it's pervasive corruption, we're sailing the same course.

People are controlled because they are gullible and naive, well meaning though you may be.

Rand Paul approved Pompeo for one of a million examples.

Where's get rid of the leaching, corruption enabling Fed in your list?? 

Hold on, are you from New York City? 

In reply to by FireBrander

Give Me Some Truth Conscious Reviver Wed, 05/02/2018 - 10:52 Permalink

We can’t drain the swamp until the MSM first reports on everything the swamp critters are doing, and why. Then maybe Average Joe would “get it.”

At the end of the day it’s the so-called “watchdog press” that protects the government and political Status Quo. We the people need to demand that the Fourth Estate do its job. If it doesn’t (which it won’t), we are going to have to try to do their job for them.

... But the politicians,  bureaucrats and central and private bankers who operate in almost total secrecy aren’t going anywhere. “Someone” has their backs ...  and that someone is the establishment press.

In reply to by Conscious Reviver

dirty fingernails Wed, 05/02/2018 - 09:03 Permalink

In other news, a US court has ruled that Iran must pay billions to families of victims of 911. Seriously.

The march to war continues as evidence is fabricated, exactly like W did for Iraq

FireBrander dirty fingernails Wed, 05/02/2018 - 09:32 Permalink

Edit: I found the story at a slightly more credible site than RT...two years old...just a poke in the eye of Iran.

Also, didn't Obama fly a pallet of cash to Iran? Even-Steven! But it made for a good headline...

2012, the USA steals $2 Billion from Iran.
2016, Obama hands Iran $2 Billion.

That'll teach'em!…

In reply to by dirty fingernails

dirty fingernails FireBrander Wed, 05/02/2018 - 09:36 Permalink

Monday's ruling in the case - Thomas Burnett, Sr et al v. The Islamic Republic of Iran et al - finds "the Islamic Republic of Iran, the Islamic Revolutionary Guard Corps, and The Central Bank of the Islamic Republic of Iran" liable for the deaths of more than 1,000 people as a result of the September 11 attacks, Judge George B Daniels of the Southern District Court of New York wrote.

Fuck you. And if you think the NY times is more credible than RT, you're retarded, insane, or another fucking troll.


Troll: that was Iran's cash. When the mugger drops a $20 I guess he "gave" you $20 by your twisted logic.

In reply to by FireBrander

Give Me Some Truth GreatUncle Wed, 05/02/2018 - 11:01 Permalink

Identifying the official meme of the day, or week, or year is so easy a kindergarten student could do it. It’s almost like one person - or one Deep State cabal - is writing said meme. 

It’s up to the press to disseminate it. Which they are eager to do.

The Meme Writers also surely coined the rules on those topics that cannot be investigated or reported.

In reply to by GreatUncle

nathan1234 Wed, 05/02/2018 - 09:10 Permalink

Some unexpected expense due to usage of Tomohak missiles and expense involved in buying some more as replacement and to use again.

Kindly be assured that there will be a bang for your buck

surf@jm Wed, 05/02/2018 - 09:25 Permalink

Well, that's just peachy........

And while they indebt my great great great great grandchildren for their hamburgers today, I wonder if I could float some junk bonds also, for my bloated budget?.......

looks so real Wed, 05/02/2018 - 09:37 Permalink

What I understand is expenses are raising so they plan to fund those expenses their for continuing the raising expenses why don't they cut the funding and let prices drop?

buzzsaw99 Wed, 05/02/2018 - 09:41 Permalink

there are ~ $13T in bank deposits drawing zirp.  most of that should be in t bills but people are too stupid to figure that out.  cash in the bank is the biggest fuck job on the planet.  "they" get ioer, "they" get huge bonuses from leveraged lending using your money as a reserve and you get nothing but a eroding piece of shit.