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For the first time in more than five years, the U.S. Treasury in coming months will be scaling back its mammoth quarterly sales of notes and bonds, Wall Street dealers say -- in a shift so large it’s likely to more than counter the Federal Reserve’s looming reduction in purchases.
The Treasury Department on Wednesday will announce its so-called quarterly refunding of longer-term securities, when it typically lays out any coming changes to debt-issuance strategy. While most dealers expect no change in the $126 billion size of recent refundings, many see officials setting the stage for a reduction from November.
Issuance has been going the other way for years, thanks to surging federal budget deficits in the wake of President Donald Trump’s tax cuts and later the emergency spending caused by the pandemic. Even with Congress negotiating new spending on infrastructure and social programs, borrowing needs are set to drop, as lawmakers plan fresh revenue measures for those multi-year initiatives.
“Their financing needs will fall very sharply from 2021 into 2022,” said Meghan Swiber, a rates strategist at Bank of America Corp. “We think Treasury needs to implement cuts sooner rather than later -- or it risks being over-funded,” she said.
The reduction in sales will likely -- if economists’ forecasts are right -- come during a time when the Fed will be reducing its purchases of Treasuries. Fed Chair Jerome Powell said last week that policy makers have begun discussing the timing and pace of future tapering. Analysts expect them to start by early 2022.
JPMorgan Chase & Co. predicts total net issuance of debt, including bills, at $1.46 trillion for 2022, down about $860 billion from this year.
For notes and bonds alone, net issuance will be about $1 trillion less next year versus 2021, the bank says. Meantime, the Fed will only be buying, from the secondary market, $316 billion of such securities in 2022, given its tapering --down from $960 billion this year, JPMorgan forecasts.
Reduced Treasuries issuance could further diminish any lingering concerns about a 2013-style taper tantrum, when markets took fright at the prospect of Fed stimulus withdrawal. The slide in Treasury yields in recent months had already helped quell such worries.
Read: Congressional Budget Office’s latest deficit outlook
Apart from the refunding, the Treasury is currently grappling with maneuvers to avoid hitting the federal debt limit, after a two-year suspension of the ceiling ended Sunday. Economists and strategists alike anticipate Congress will act to boost or suspend the limit again before the Treasury runs out of room to avert a payments default in the fall.
Read More: Treasury Starts Special Measures to Avoid Breaching Debt Limit
Primary dealers, which trade directly with the Fed, aren’t united on when the scaling down in issuance of so-called coupons -- notes and bonds -- will occur.
Among those in the November camp:
- Bank of America
- Credit Suisse Group AG
- Deutsche Bank AG
- JPMorgan
- NatWest Markets
- Societe Generale
- Wells Fargo & Co.
Goldman Sachs Group Inc. and Morgan Stanley see the February refunding as a more likely starting point. But Barclays Plc and RBC Capital Markets say it could start with the auctions being held next week.
If the majority are right, the Treasury will keep the refunding at $126 billion, composed of the following:
- $58 billion of three-year notes
- $41 billion of 10-year notes
- $27 billion of 30-year bonds
It’s a far cry from the pattern since even before the pandemic struck. Total Treasury debt outstanding has surged by about 50% since late 2017, to $21.7 trillion.
Much of the increase in 2020 came in the form of bills, as the Treasury rushed to accumulate cash to use for emergency relief spending. T-bills hit some 25% of the total share of the Treasury debt pile outstanding last year.
It’s now about 20%, after cutbacks in issuance to work down what had been a record cash pile. The Treasury Borrowing Advisory Committee, made up of major dealers and investors, advised a recommended range of 15% to 20%.
The Treasury on Monday releases its quarterly financing estimates, and will give a fresh reading on cash balance assumptions for coming quarters. Details on plans for bill issuance should be revealed on Wednesday.
The shrinking of the deficit -- to $1.2 trillion next year from $3 trillion this year, in the latest Congressional Budget Office projections -- is mainly a reflection of the pandemic’s retreat.
“Of course, these debt reductions aren’t coming because we are getting anywhere near having balanced budgets,” said John Briggs, global head of desk strategy at Natwest Markets. “Our equilibrium end state -- say, after August 2022 -- will still have the debt higher than before the pandemic, with the recognition that deficits are going to be here for a long time.”
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