Wall Street is expecting the US Treasury to unveil a final boost to its long-term debt sales this week, addressing the ongoing challenge of funding a widening budget deficit. The Treasury Department is likely to proceed with its November guidance of a third round of increases in quarterly refunding auctions, potentially reaching a total of $121 billion, close to the record sizes witnessed during the Covid crisis.
Despite the Federal Reserve signaling a slowdown or halt in its reduction of Treasury holdings, the Treasury still faces the reality of sustaining large auctions, with some reaching record sizes. Analysts suggest that maintaining current coupon auction sizes for the next 12 to 18 months is crucial to prevent Treasury bills’ share of total debt from deviating from an optimal level.
Treasury Secretary Janet Yellen’s debt management strategy last year relied heavily on short-term bills, comprising about 22% of publicly held debt outstanding, surpassing the recommended 15% to 20% range. Any over-funding resulting from a faster tapering of Fed holdings may lead to adjustments in bill sizes.
The recent rally in Treasuries, driven by expectations of Fed interest rate cuts, has alleviated concerns about excessive federal debt issuance. However, the Treasury’s plan to increase refunding auctions in August contributed to market worries. The upcoming $121 billion plan includes increases in 3-year, 10-year, and 30-year notes and bonds.
Market watchers speculate that this might be the final increase in coupon auction sizes, and the Treasury’s policy statement on Wednesday is eagerly anticipated. Changes in debt issuance plans over the next three months, potential increases in Treasury Inflation-Protected Securities (TIPS) sales, and details on a planned buyback program for existing securities are also expected.
Analysts hold varied forecasts, with some predicting sustained increases in coupon-bearing debt, while others anticipate a smaller boost and potential adjustments based on market conditions. The Treasury’s buyback program is seen as a strategic move to enhance cash management and liquidity for off-the-run Treasuries, aligning with the surge in revenues expected during the April tax-filing deadline.
