(Bloomberg) — The U.S. Treasury Department will keep its long-term debt sales steady in a new plan this week, with the government expected to soon get relief from the Federal Reserve’s rapid reduction of its securities holdings.
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Traders expect the Treasury on Wednesday to stick to its January forecast of withholding further increases in its so-called quarterly refund auctions – which are now approaching Covid crisis record sizes. That would mean $125 billion worth of longer-term securities auctions next week.
Borrowing needs have escalated due to a gaping budget deficit and the Fed’s quantitative tightening program – which has resulted in up to $60 billion worth of Treasuries disappearing from the central bank’s balance sheet, forcing the government to sell more to private buyers sell. The Fed will provide an update on its plans on Wednesday, after officials suggested in March that they could soon slow the QT pace.
The Treasury market could use the help.
U.S. Treasury bonds headed for their biggest monthly loss since 2022 at Thursday’s close, weighed down by hot inflation data that sharply dampened Fed rate cut expectations and inflated auction sizes. Sales of longer-term securities surprised traders two weeks ago with weak demand despite higher yield levels.
“I’m not so sure this is all going to help Treasuries as much as it’s going to hurt them,” said Michael Pugliese, senior economist at Wells Fargo & Co., pointing to the Fed’s QT tapering and stabilization the plans to sell government bonds. “Issuance volume is still very high and we are learning – somewhat in real time – how well these auctions are being digested.”
Pugliese is among Fed watchers who expect the central bank to announce QT tapering will begin in June. Chairman Jerome Powell, who will hold a news conference following the Fed’s policy decision on Wednesday, said in March that the tapering process would begin “fairly soon.”
QT focus
The Treasury Department’s quarterly funding estimates, due to be released in Washington on Monday afternoon, underscore investors’ focus on the offering and have received increasing attention. With solid jobs and economic growth, tax revenues have been strong recently, improving the near-term deficit situation. In January, officials estimated net borrowing of $202 billion for the three months through June.
Debt managers have been keeping a close eye on the Fed’s plans and asked traders about their own expectations for the Fed’s QT in a survey ahead of the refund statement – which comes several hours before the Fed’s release.
Tom Simons, a senior economist at Jefferies, predicts the Fed will cut its Treasury tapering in half immediately after Wednesday – to as much as $30 billion a month. Simons said it is unclear whether Treasury debt managers will factor likely Fed QT changes into Monday’s quarterly funding estimates.
There is unlikely to be any easing on the interest rate front for the time being. With the federal government’s debt-servicing costs set to hit a record high as a percentage of GDP next year, high inflation means Powell and his colleagues are unlikely to signal rate cuts in the coming months.
Tariff debate
Swap traders are pricing in only about 33 basis points of Fed rate cuts for all of 2024, compared with more than six quarter-point cuts expected at the start of the year. The Fed is expected to keep its key interest rate range steady at 5.25% to 5.50% on Wednesday – where it has been since last July.
“The biggest shift in language will come from Powell’s messages during the press conference,” said Lindsey Piegza, chief economist at Stifel Financial Corp. “Here he will really have an opportunity to dial back some of that optimism for a while.” short-term rate cut. Inflation data has moved in the wrong direction, although we will not overreact to it.”
As a result, investors have to contend with extensive auctions in a still inflationary environment.
Auction sizes for several tenors just reached new records. With yields not far from 5% across the maturity spectrum, investors are favoring shorter-dated Treasuries, as last week’s low-issue sales showed. But demand for 10-year bonds was seen as abysmal earlier this month, while demand for 30-year bonds was subdued.
Auctions with terms of 3, 10 and 30 years are scheduled for next week, which make up the refund group.
A $125 billion plan this time would mean the following upcoming refund auction sizes:
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Three-year notes worth $58 billion on May 7
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$42 billion in 10-year notes on May 8th
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$25 billion in 30-year bonds on May 9th
New three-year bonds are auctioned every month, and the Treasury increased them by a total of $4 billion in March and April.
Traders assumed that the level of variable-rate debt would remain stable in the next three months.
Selling Treasury Inflation-Protected Securities (TIPS) is the only type of debt that traders predict will see some increase. HSBC Holdings Plc expects the Treasury will simply increase the five-year TIPS reopening auction by $1 billion in June. At JPMorgan Chase & Co., TIPS strategists expect TIPS to rise with a $1 billion increase for the new 10-year issuance in July.
Traders are also seeing U.S. debt managers begin to move away from relying on notes that have maturities of up to a year and pay no interest. The Treasury Borrowing Advisory Committee, a panel of market participants, has reported the share of debt securities that exceed the 15% to 20% range as a share of total debt. This is also because the Treasury has room to reduce its cash balance, which currently stands at over $900 billion.
Read more: Wall Street sees fewer T-bills in April amid strong tax season
Traders will also be watching on Wednesday for the exact date for a long-awaited Treasury Department program to buy back existing debt. The initiative aims, in part, to support market liquidity and also to help with cash management – thereby smoothing out some of the fluctuations in invoice issuance associated with high tax revenues.
Most traders expect the first buybacks to take place in May. The Treasury Department last conducted buybacks between March 2000 and April 2002.
Bond investors will also have to contend with a wealth of economic data throughout the week. There will be reports on housing construction, consumer confidence and manufacturing activity, but investors will focus on more insight into the state of the U.S. labor market. March job openings will be of interest, but most important will be the release of non-farm payrolls for April on Friday.
As for the Fed, Powell will be joined on Wednesday by New York Fed President John Williams and Chicago Fed President Austan Goolsbee on Friday.
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