Just In Time For The Taper: Treasury Cuts Long-Term Debt Sales For The First Time Since 2016
Heading into today’s Treasury refunding announcement, consensus expected Janet Yellen to trim the size of the coming quarterly debt sale by roughly $2 billion per tenor, the first such cut in long-term debt sales since Feb 2016. And, with the Fed set to announce a taper later today, its joint-venture partner in Helicopter Money, the US Treasury did precisely as expected (and precisely as one would expect in a time of tapering), when it said it would sell $120 billion of long-term securities at auctions next week, down $6 billion from the record $126 billion level seen over the past three so-called quarterly refundings, as it plans to reduce coupon auction sizes across all maturities.
Specifically, the Treasury will sell:
$56BN of 3-year notes on Nov. 8, down from $58BN
$39BN of 10-year notes on Nov. 9, down from $41BN
$25BN of 30-year bonds on Nov. 10, down frrom $27BN.
The Treasury said the auctions will raise about $44.1BN in new cash.
Further cuts will be done in regular auctions of all longer-term securities in coming months, with the sole exception of inflation-linked debt. The deepest cutbacks will be in seven-year and 20-year Treasuries, which had seen bigger increases in issuance during the ramping up of debt sales to meet Covid-19 needs.
“Based on the latest fiscal outlook, current auction sizes are projected to provide excess borrowing capacity over the intermediate term,” Treasury says in statement. “Accordingly, Treasury intends to reduce auction sizes across all nominal coupon securities, starting with modest reductions over the upcoming November 2021 to January 2022 quarter. This approach reflects Treasury’s desire to preserve flexibility to adjust future financing plans in light of the remaining uncertainty in the fiscal outlook. Any additional issuance-size changes will be announced quarterly in subsequent refunding statements.”
The Treasury added that it plans to address any seasonal or unexpected variations in borrowing needs – which will certainly come since the debt ceiling is still a thing – over the next quarter through changes in regular bill auction sizes and/or CMBs.
A summary of the Treasury’s debt issuance schedule is shown below:
The table shows that over the following months, the Treasury will do the following:
Reduce sales of 2-, 3-year and 5-year note auctions by $2 billion per month over the next three months
Cut 7-year notes by $3 billion per month over the next three months
Decrease both the new and reopened 20-year bond auction sizes by $4 billion, starting in November
Reduce both the new and reopened 10-year note auction sizes by $2 billion, starting in November
Reduce both the new and reopened 30-year bond auction sizes by $2 billion, starting in November
Cut reopening sizes of floating rate note sales in November and December by $2 billion each, with the same reduction for the next new-issue two-year FRN in January
As for Treasury Inflation-Protected Securities, which compensate for increases in consumer prices, those will be kept steady over coming months. Dealers had predicted that TIPS wouldn’t be cut back. The follow are some details on the TIPS auction plans:
10-year TIPS reopening in November of $14 billion
5-year TIPS reopening in December of $17 billion
10-year TIPS new issue in January of $16 billion
The Treasury said that the planned schedule through year-end will lead to TIPS auctions rising by a total of $17 billion in gross issuance for 2021 compared with 2020.
Overall, there were no surprises in today’s announcement, which was in line with the expectations of Wall Street bond dealers who had predicted the Treasury would trim auctions of regular coupon bearing debt beginning this month. They did diverge on just how big the cuts would be for securities with 10 years or more to maturity.
November’s $120BN refunding compares with $62BN as recently as November 2017; since then auction sizes across the curve rose to finance tax cuts in 2018 and then exploded in 2020 to fund the covid pandemic response.
The auction size reduction comes not only as the Fed begins to taper, but as Biden’s fiscal stimulus plans have crashed and burned in Congress, shrinking in half from $3.5 trillion to $1.75 trillion and falling. This means that far less debt will be needed in the future and hence, smaller auctions.
“The slightly larger reductions in auctions sizes for the 7-year and 20-year coupon securities reflects Treasury’s desire to better balance structural supply and demand at those tenors,” which “were increased significantly more than others in response to the increased borrowing needs driven by the COVID-19 pandemic”
Curiously, on Monday, the Treasury increased its estimate of federal borrowing needs for the three months through December above $1 trillion as it scrambles to rebuild its cash pile ahead of the next debt ceiling deadline in early Dec.
Floating-rate note reopening size will drop by $2 billion for Nov and Dec (resulting in a $24 billion auction size for each). Treasury anticipates decreasing the size of the next new-issue 2-year FRN auction in January by $2 billion to $26 billion. Changes in nominal and FRN auction sizes will reduce issuance to private investors by $84b compared to the previous quarter. Treasury Inflation-Protected Securities auctions during the quarter will include a $14b 10- year reopening in Nov., a $17b 5-year reopening in Dec. and a $16b 10-year new issue in Jan., the same size as in July
Regarding a SOFR-linked FRN, the department has decided it “is not necessary to meet its borrowing needs at this time.”
Addressing the debt limit, the Treasury said that Janet Yellen stated in a letter to Congress on October 18, 2021 that the $480 billion increase in the debt limit provided “a high degree of confidence that Treasury will continue to be able to finance the operations of the federal government through December 3, 2021.” The letter also stated that “it is imperative that Congress act to increase or suspend the debt limit in a way that provides longer-term certainty that the government will satisfy all its obligations.”
Following the $480 billion debt limit increase signed into law on October 14, 2021, Treasury was able temporarily to increase its cash balance to a level closer to, albeit below, its stated cash balance policy, primarily through increases in regular benchmark bill auction sizes, as well as several large ad hoc CMBs.
Amid the Treasury’s scramble to rebuild its cash balance, the coupon-bearing auction trimming should give Treasury room to bolster bill supply, or rather once it’s no longer contrained by the limits of its borrowing authority when the debt ceiling situation is resolved. Even so, the Treasury anticipates that the supply of bills will generally decline from current levels until Congress acts again to increase or suspend the debt limit. We saw precisely this yesterday when the Treasury also cut the size of future bill auctions. The Treasury also said it will continue to supplement its regular benchmark bill financing with weekly issuance of the 17-week CMB for Tuesday settlement, at least through the end of January. Maintaining the 17-week CMB will provide the requisite flexibility to address potential changes in borrowing needs resulting from uncertainty associated with the fiscal outlook.
Separately, after asking bond dealers ahead of Wednesday’s announcement about the idea of making the 17-week bill issuance routine, the Treasury said it’s not for now adding that as a benchmark.
The market reaction to the refunding announcement was modest, with the 20-year sector outperforming due to the outsized issuance cuts in the tenor, dropping the 10s20s30s butterfly spread to session lows after Treasury announces $4b cuts to 20-year bond refunding and reopening sales, the biggest of the reductions to auction sizes across the curve. The 10s20s30s fly richens from around 43bp before the announcement to under 40bp session lows in the aftermath. The 20s30s curve, which inverted last week for the first time, steepens back to near zero after the announcement.
Wed, 11/03/2021 – 09:04