The U.S. Treasury this week releases the next stage of its strategy to cover a deficit that’s expected to surpass $1 trillion this fiscal year, as the department continues to search for new ways to attract buyers for its record debt issuance.

It needn’t agonize just yet, however. For the next few months the Federal Reserve will be scooping bills out of the market -- part of its effort to calm the repo market -- about as fast as the government can pour them in.

Dealers roughly agree on the contours of Wednesday’s quarterly refunding announcement. They reckon the Treasury will keep auctions of 3-, 10- and 30-year debt unchanged next week at a record total of $84 billion. Wall Street also expects updates on two proposals: An issue linked to SOFR, the aspiring replacement for Libor in funding markets, and a 20-year bond.

The wild card is how Treasury may address the elephant in the room. Dealers expect comment on last month’s turmoil in funding markets. And to some extent, the Treasury’s borrowing plans this fiscal year will be viewed, and traded, in light of the Fed’s T-bill purchases to replenish bank reserves. The central bank embarked on the program this month, saying it will run “at least into the second quarter” of 2020 at an initial monthly pace of about $60 billion.

“They’re taking about half of net issuance next year,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.

Some say the Treasury’s relentless debt sales have contributed to a shortage of reserves in the financial system, which last month forced the Fed to resort to a money-market operation it hadn’t deployed since the financial crisis.

Treasury Secretary Steven Mnuchin has rejected that notion, saying this month that the September upheaval had “nothing to do with our issuance.” But the department is clearly curious about how dealers are coping with growing supply. It sought comment in this month’s survey on “the interaction between primary dealer positions, auction participation, and recent repo market variability.”

Debt Bottleneck
The Treasury is “trying to figure out where the bottleneck is, what sort of securities are basically getting stuck on dealer balance sheets,” said Praveen Korapaty, chief global rates strategist at Goldman Sachs.

Dealers have also debated whether the Treasury might tailor its funding plan to the Fed’s bill purchases. Strategists are broadly skeptical that the Treasury might cut coupon sizes for the first time since 2016 in response, in favor of more bills. The view is that the Treasury would only have to increase coupons again before long as the deficit expands. What’s more, issuing more bills will simply raise the department’s cash balance, amounting to another drain on reserves.

That would be a case of “the Fed giveth, the Treasury taketh away,” said NatWest rates strategist Blake Gwinn.

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