The US Treasury expanded its plans for the issuance of longer-term debt in coming months, after depending mainly on shorter-dated bills to fund the federal government’s record spending surge to address the Covid-19 crisis.
The department yesterday said it will issue a record $112bn of securities at next week’s so-called quarterly refunding of maturing Treasuries. Over the three months through October, it will ramp up issuance of nominal coupon-bearing debt by a total of $132bn compared with the previous quarter. The department plans to boost auction sizes across all nominal coupon tenors, with larger increases for the longer-dated securities maturing in seven to 30 years.
Coupon-bearing notes and bonds include periodic interest payments, while bills don’t. The Treasury more than doubled the supply of T-bills outstanding earlier this year as it rushed to finance a record stimulus program approved by Congress. Now, the Treasury is increasing longer-dated issuance to help take back some of the shortening in the average maturity of outstanding federal debt.
“Treasury will continue to shift financing from bills to longer-dated tenors over the coming quarters, using long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility,” the department said in a statement yesterday.
JPMorgan Chase & Co strategists calculated recently that the average maturity of Treasury debt had declined to its shortest since 2011.
The Treasury’s Borrowing Advisory Committee in May had noted that 30% of Treasury debt would mature within a year.
Among the changes announced yesterday:
Auctions of two-year, three-year and five-year notes will rise by $2bn per month over the quarter through October.
Seven-year note auctions will climb by $3bn per month.
“Increases of $6bn to both the new and reopened 10-year note auction sizes, and increases of $4bn to both the new and reopened 30-year bond auction sizes starting in August”.
“Increases of $5bn to both the new and reopened 20-year bond auction sizes starting in August”.
Floating rate note sales will also be increased. The initial market reaction to the news was a weakening in longer-dated Treasuries, driving the gap between the 2-year and 10-year yields slightly wider, to 43 basis points.
The 10-year benchmark yield rose as high as 0.55%.
The looming increase in supply may put pressure on the Federal Reserve to buy more Treasuries, said Priya Misra, head of global rates strategy at TD Securities. That could come as soon as next month, after the central bank conducts a review of policy objectives.
“All eyes are on the Fed,” she said. “We expect them to announce that in September,” Misra said of a bump in Fed purchases. With another fiscal stimulus package looming, uncertainties remain over the exact funding needs in coming months.
On Monday, the Treasury said it expected to raise $947bn in debt over the three months through September, and another $1.216tn in net marketable debt in the final three months of 2020.
Those projections were based on a placeholder calculation of $1tn of additional funding needs stemming from the virus-relief bill under negotiation in Washington.
Republicans have proposed that amount in their plan, while Democrats are pressing a more comprehensive $3.5tn package, which cleared the House in May.
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