US Treasury slows pace of auction increases for long-dated debt

By Karen Brettell

(Reuters) – The U.S. Treasury Department on Wednesday said it will slow the pace of increases in its longer-dated debt auctions in the November 2023 to January 2024 quarter and expects it will need one more additional quarter of increases after this to meet its financing needs.

Treasury yields fell after the announcement on relief the increases were not as large as some had feared. It comes after the U.S. government on Monday cut its borrowing estimate for the quarter to $776 billion, $76 billion less than its forecast in July.

Treasury has been increasing auction sizes to fund a budget deficit which is increasing due to several factors, including higher government spending, which includes rising federal government borrowing costs stemming from the Federal Reserve’s interest rate increases and quantitative tightening.

Monday’s borrowing estimate, however, came in less than expected partly because income tax payments from some states deferred due to natural disasters were now starting to flow in.

“It wasn’t as bad as feared. The guidance that there may be only one more quarter where it increases was somewhat comforting,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

The issuance details were announced hours ahead of the next interest rate decision from the Federal Reserve. U.S. central bank officials are broadly expected to leave rates on hold at 5.25%-5.50% for the second straight meeting, and ahead of the gathering a number of them had pointed to the sharp rise in bond yields since early summer as perhaps doing some of their work for them.

Should the lower-than-anticipated amounts of new debt issuance continue to pull Treasury yields lower, as they did immediately after the announcement, Fed officials may be put in a position to rethink that premise.

The market reaction was in contrast to last quarter when the U.S. government said it expected to borrow $1.007 trillion in the July-September quarter, $274 billion more than it had predicted in May, sparking a large bond sell-off.

This time, the Treasury focused its largest supply increases in short- and intermediate-dated auctions. Longer-dated debt, which has faced the brunt of the selloff over the past few months, saw more moderate increases.

“The Fed has lowered its bond issuance in the long-end of the curve compared to August in an effort to calm the panic in bond markets. They lit a fire in the bond markets in August with the last refunding announcement and now they are attempting to put it out,” said Bruce Clark, macro strategist at Informa Global Markets in New York.

The Treasury will increase the size of its 10-year new issue and reopenings by $2 billion, down from $3 billion at the last refunding, and raise its $30-year bond new issue and reopenings by $1 billion, down from the prior increase of $2 billion. The 20-year bond auction sizes will remain unchanged, following an increase of $1 billion last quarter.

Two-year and five-year note auctions will be increased by $3 billion per month, and 3-year and 7-year note auctions will rise by $2 billion and $1 billion per month, respectively.

The Treasury plans to sell $112 billion in its quarterly refunding next week. This will include $48 billion in three-year notes, $40 billion in 10-year notes and $24 billion in 30-year bonds.

The government will also increase the size of its two-year floating rate note new issue and reopenings by $2 billion.

Some Treasury Inflation-Protected Securities (TIPS) auction sizes will also be increased, with a $1 billion increase in the December 5-year TIPS auction and January 10-year TIPS auction.

The Treasury also said it expects to implement “modest reductions” to short-dated bill auctions by early December, which are expected to be maintained through mid- to late-January. The bill auctions will be held at current levels through late in November.

It is also considering changing its regular 6-week cash management bill to a benchmark, and will announce this decision at the next refunding. The Treasury added that it continues to make “significant progress” on its plans to launch a regular buyback program in 2024.

(Reporting By Karen Brettell; Additional reporting by Herb Lash, Chuck Mikolajczak and Shankar Ramakrishnan; Editing by Megan Davies, Dan Burns, Paul Simao, Andrea Ricci and Chizu Nomiyama)