The US Treasury is expected to make its fourth straight reduction in a quarterly sale of longer-term debt this month, with most dealers predicting extra cutbacks for the 20-year bond.
The Treasury on Wednesday will announce its so-called quarterly refunding auction, and dealers expect a fourth straight reduction in total issuance -- the longest such string in about eight years. That’s seen giving the department room to ramp up sales of Treasury bills, which have been in big demand as investors have flocked to short-dated instruments amid economic uncertainty.
In its broader announcement on debt issuance over the coming quarter, many dealers predict the Treasury will put extra weight on trimming back sales of the 20-year bond, which was reintroduced two years ago but has proved more costly than either 10-year or 30-year Treasuries.
“The problem child in the Treasury’s auction line-up” is how Lou Crandall at Wrightson ICAP LLC terms the 20-year bond. While he had criticized the Treasury’s abandonment of the 20-year back in 1986, today he highlights that its resurrection hasn’t won backing from the market.
Most dealers see the refunding, which spans 3-year, 10-year and 30-year securities, totaling $98 billion, down from the $103 billion sold in May. Record revenues -- stoked in part by strong wage gains in the current high-inflation economy -- have given the Treasury space to trim its borrowing.
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In the run-up to the refunding, the department queried dealers on the low levels of T-bills in the marketplace. That bolstered expectations for a potential expansion in bill sales as the Treasury trims coupons, or interest-bearing securities.
“There’s a need for more Treasury bills, so another round of coupon-cuts is required,” said Michael Cloherty, head of US rates strategy at UBS Group AG. “Given the growth of the money-fund industry over recent years, it’s appropriate for the percentage of T-bills to be even higher than it used to be” as a share of overall federal debt, he said.
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As for coupons, the Treasury has made larger reductions to the 20-year bond along with seven-year notes in recent quarters. There is some disagreement among dealers over just which tenors are likely to be cut this time around, and by how much.
• HSBC Holdings Inc. and Nomura Securities both see cuts of $1 billion per month to sales of 2-, 3-, 5- and 7-year debt over the coming quarter and similar-sized trimmings to new-issue and reopening sales of 10- and 30-year securities. For the 20-year, they predict a $3 billion cut to new-issue and reopening auctions
- Societe Generale, Citigroup Inc. and RBC Capital see similar reductions, except the outsized trimming of the 20-year is only on the order of $2 billion at each sale
- UBS Group AG and Bank of America Corp. for their part are closely in line, except they see heavier cuts to both 7-year and 20-year debt
• Goldman Sachs Group Inc. sees only reductions to the 5-year, 7-year and 20-year maturitie
- While Deutsche Bank AG forecasts reductions for just the 7-year and 20-year tenors
Dealers generally agree that sales of Treasury Inflation-Protected Securities, known as TIPS, are likely to be increased again. The government has been trying to increase TIPS as a share of the outstanding debt over time.