Higher Spending Needs Prompt Increase
The U.S. Treasury Department is expected to announce another round of increases in its auction sizes for the upcoming quarter. This decision comes as the department faces higher spending needs. The increase in spending is partly due to higher social security and interest rate costs. However, it is anticipated that the Treasury will pause increases for the remainder of the year. This news should provide some relief to investors who have been concerned about the growing supply.
Focus on Borrowing Estimate
Investors will particularly focus on the Treasury’s borrowing estimate for the quarter. They will assess whether it is higher or lower than the previous projection of $816 billion. The Treasury will release its financing estimate for the next two quarters on Monday. Additionally, detailed information regarding auction sizes for the next quarter will be provided on Wednesday.
Expectations for Auction Size Increases
The Treasury is likely to increase auction sizes for most Treasury maturities, excluding the 20-year bond that generally experiences lower investor demand. The size of these increases is expected to be similar to those implemented in November. However, there are uncertainties surrounding whether the Treasury will continue to increase the supply of 30-year bonds. “The biggest wild card for the refunding is going to be whether or not the 30-year sector is upped again,” said Vail Hartman, U.S. rates strategist at BMO Capital Markets.
Improved Market Conditions
Concerns about supply and the view that the Federal Reserve would maintain higher rates for a longer period caused weak auctions for the 30-year maturity last year. Nevertheless, analysts now anticipate another increase in the 30-year auction size. They believe that the market has stabilized and that yields on longer-dated Treasuries have significantly declined from their recent highs. “The case for further reductions in the long-end, at least as a percentage of overall increases, isn’t nearly as strong after the rally,” said Jonathan Cohn, head of U.S. rates desk strategy at Nomura Securities International.
Increased Bill Issuance
The Treasury will likely continue to increase bill issuance for a few more months, even surpassing the recommended range by the Treasury Borrowing Advisory Committee. Bills, which have short-term maturities, provide the Treasury with flexibility, especially during concerns about the digestion of longer-dated debt in the market. The Treasury’s balance sheet reached approximately $9 trillion in mid-2022 and has now decreased to $7.7 trillion.
Taper and Buyback Program
The taper might eventually lead to lower financing needs for the Treasury. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, states, “Deficits are still going to stay high, but one of the things that they can lean on is that their total financing needs will probably decline somewhat because they won’t have to pay back the Fed.” Furthermore, the Treasury may announce plans to launch a buyback program. This program would involve purchasing less liquid debt while increasing the issuance of the most liquid and current issues. The goal is to enhance liquidity in the market.