For the first time since early 2021, the Treasury will boost its so-called quarterly refunding of longer-term Treasuries, to $102 billion from $96 billion, the consensus among dealers suggests. While down from the record levels hit during the Covid-19 crisis, that’s well above pre-pandemic levels.
Wednesday’s announcement will likely also see debt managers hoist regular auction sizes for securities across the yield curve – with potential exceptions or smaller bumps for notes less in demand. Dealers will be on watch separately for an update on a coming program to buy back older Treasuries.
Public borrowing needs are on the rise thanks in part to Federal Reserve rate hikes that have taken its policy benchmark to a 22-year high – in turn driving up yields on government debt, making it more costly. The Fed is also shrinking its holdings of Treasuries, obligating bigger government sales of them to other buyers. It all raises the risk of bigger volatility swings when the government auctions its securities.
“There’s just a lot of supply coming,” said Mark Cabana, head of US interest-rate strategy at Bank of America Corp. “We’ve been surprised by the deficit numbers, which are sobering.”
Larger amounts of debt issuance haven’t translated directly into lower prices and higher yields, as the swelling in US debt alongside historically low yields attests over the past two decades. But bigger auction sizes contribute to the potential for short-term volatility, at a time when banks have diminished appetites for market making. That was on display in a seven-year auction on Thursday that saw buyers demand a bigger discount to absorb the securities.
What has sent yields higher is Fed rate hikes and inflation, a key dynamic widening the budget deficit. The cost of servicing US government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion – part of a global phenomenon propelling public borrowing.Cabana and his team forecast the Treasury will bump up sales of coupon-bearing debt – as notes that pay interest are known – not only this month, but again in the November and February debt-management policy announcements.
The consensus of dealers’ projections shows the following for the upcoming refunding auctions:
Beyond those sales, most dealers see a lift in issuance across most maturities at a clip of $2 billion each, with many seeing smaller increases for 7- and 20-year Treasuries, which have seen bouts of poor demand.
Some dealers predict the 20-year bond will be singled out for no change in size. That security has been plagued by weak pricing and liquidity since the Treasury relaunched it in 2020.