Treasury Announces Record Debt Sale In Upcoming Refunding Auction

Treasury Secretary Steven Mnuchin is about to surpass Timothy Geithner's achievement of selling a record amount of notes and bonds as he seeks to finance America’s soaring budget deficit.

According to the latest quarterly refunding statement, the US Treasury is about to sell a record amount of debt, surpassing levels seen both in the aftermath of the Great Depression and the Global Financial Crisis.

On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed's ongoing balance sheet shrinkage.

Here are the details of the TBAC's proposal:

  • Auctions for 2-, 3- and 5-year notes will increase by $1 billion in both of the next two months; last quarter Treasury implemented increases in all three months
    • As a result, the size of 2-, 3-, and 5-year note auctions will increase by $2 billion, respectively, by the end of January. 
  • Auctions for 7-, 10-, 30-year notes to be raised by $1 billion in November and then kept steady through January
  • Auctions for 2-year floating-rate note will rise by $1 billion in November
  • Auctions for TIPS will see various changes with total tips issuance rising $20 billion-$30 billion in 2019, however there will be no TIPS supply changes over next three months; a new CUSIP 5-year will be added to the TIPS calendar, with the new security to be introduced October 2019

In total, the Treasury will sell $83 billion in long-term debt next week - consisting of $37BN in 3 Year notes, $27BN in 10 Year notes and $19BN in 30 Year notes, versus $78 billion in August’s refunding week sales.

Meanwhile, as noted on Monday, the net amount of new cash raised by the Treasury this quarter is expected to be $425 billion, a slight reduction from the $440 billion forecast made by the Treasury in July.

Notably, Bloomberg notes that the debt issuance at this quarterly refunding will surpass the previous record of $81 billion set by former Treasury Secretary Timothy Geithner in 2009 when the U.S. was issuing record amounts of debt to fund its recovery from the Great Recession. Of course, this time borrowing is surging as the economy hums along at a 3.5% annual growth rate and unemployment is near a half-century low, a paradox which many are confident will end up making the next recession that much worse as the US will have little fiscal dry powder.

While the announcement came in line with expectations, it helped push 10Y yields to a session high of 3.16% before the move faded back to 3.14%, almost unchanged on the day as Treasury vol remains non-existent.

As Bloomberg notes, the Treasury release may draw more attention to rising federal deficits less than a week before midterm elections: Trump, who is expected to sell $1.3 trillion in total Treasury debt this calendar year, had often criticized Barack Obama for running up the budget deficit, and in 2012 recommended banning lawmakers from reelection if Congress couldn’t balance the budget.

Meanwhile, between the Fed's quantitative tightening and Trump’s deficit-busting policies which has sent the US debt soaring, some say it is only a matter of time before debt buyers of US paper boycott the relentless increase in issuance with demands for far higher interest; for now Treasury Secretary Steven Mnuchin has dismissed any such worries.

“The market has handled the supply very well,” Mnuchin said earlier this month, adding that demand for U.S. government bonds remains strong.

For now, perhaps, but recall that the US Treasury is on track to sell $1.34 trillion in new debt this year, more than double the amount sold in 2017. As such, it's only a matter of time before bond buyers hit the reset button and start demanding far higher interest rates, unless of course the US economy slumps into a recession when the calculus will be dramatically revised as there is a great rotation out of stocks into bonds, offset by an even greater increase in the net supply of US paper.

Finally, putting all of the above in context, the US Treasury paid over half a trillion dollar just to fund interest on all this debt. This number is set to explode higher in the coming years.