(Bloomberg) -- The US Treasury signaled it's still comfortable issuing the shortest-dated debt to meet escalating government borrowing needs — even as warnings emerge about the strategy's risks.
The Treasury anticipates keeping nominal note and bond sale sizes unchanged "for at least the next several quarters," the department said in a quarterly statement on debt policy Wednesday. "Treasury believes its current auction sizes leave it well positioned to address potential changes to the fiscal outlook" and shifts in the Federal Reserve's purchases of Treasuries, it said.
US debt managers have been using the same forward guidance since early 2024, in a policy that's steadily boosted the share of bills — which mature in up to a year — of total debt outstanding. The International Monetary Fund cautioned last month that this leaves federal debt costs more vulnerable to sudden swings in rates and shifts in sentiment, because auctions are more frequent.
The Treasury also reiterated that it's monitoring "growing demand for Treasury bills from the private sector" and the pace of the Fed's purchases. And it repeated that it's continuing to look at potential future increases of nominal coupon and floating-rate note sales, "with a focus on trends in structural demand and potential costs and risks of various issuance profiles."
While uniformly expecting the Treasury to keep auctions unchanged for now, dealers were divided heading into the so-called quarterly refunding release on whether it might alter its guidance. Outsize US fiscal deficits make an expansion in longer-dated auctions practically inevitable at some stage. The department on Monday boosted its estimate for net borrowing this quarter amid lower net cash flows.
'Little Urgency'
Treasury Secretary Scott Bessent has largely kept the forward guidance inherited from his predecessor, Janet Yellen, despite having criticized it before he took office. Last year, he flagged that the higher yields on longer-dated securities meant it was unattractive to ramp up issuance of such debt.
"Bessent has little urgency to move away from utilizing the bill market to fund additional borrowing needs at the moment," said Vail Hartman, a strategist at BMO Capital Markets. "The decision to reiterate prior guidance should delay market expectations for the timing of the next upsizing to coupon issuance further into next year."
Ten-year Treasuries held gains after the release, with yields down about 6 basis points at 4.37% as of 9:45 a.m. in New York.
As for next week's $125 billion of refunding auctions, they will be made up of:
- $58 billion of 3-year notes on May 11
- $42 billion of 10-year notes on May 12
- $25 billion of 30-year bonds on May 13
The refunding will raise new cash of approximately $41.6 billion, the Treasury said.
The Treasury Borrowing Advisory Committee, a panel of bond investors, dealers and other market participants, viewed that increases in sales of coupons, or interest-bearing securities, could be warranted in the fiscal year that starts in October, minutes of the group's Tuesday meeting with officials showed. The panel "discussed potential changes to the forward guidance for Treasury to consider."
Based on current sizes of auctions for coupons and T-bill supply, the Treasury faces an implied $1.3 trillion funding shortfall in the 2027-28 fiscal years, according to the median forecast of primary dealers in Treasuries, included in the minutes.
Ahead of Wednesday's announcement, the Treasury had polled bond dealers on their thoughts on effects on the government-debt market from an easing in a number of financial regulations.
The feedback was that "while the developments were directionally positive, incremental benefits from here are expected to be modest," a TBAC report showed.
Regulation Changes
The TBAC also said it "would welcome the opportunity to provide further input" on market implications of potential regulatory changes.
Federal regulators in November finalized revisions to the so-called enhanced supplementary leverage ratio, allowing large US lenders to hold less capital relative to total assets. In March, regulators unveiled an additional package of proposals tied to other rules.
Wall Street banks long said that regulations restrained their capacity to serve as intermediaries in the Treasuries market, especially during times of stress. Signs have already emerged that the changes may be having an impact: Morgan Stanley Chief Financial Officer Sharon Yeshaya said last month it has allowed the bank to provide more liquidity to the bond market.
A key source of major new demand for T-bills has been the Fed, which in December ramped up its purchases to ensure an ample amount of reserves in the banking system.
Plans for Bills
While that pace has slowed to $25 billion a month from $40 billion, the central bank is also now reinvesting proceeds from maturing mortgage securities into T-bills. In all, that adds up to a rate of hundreds of billions of dollars a year of demand that the Treasury doesn't need to fill from the private sector.
The Treasury said it expects to increase the sizes of shorter-dated benchmark bills in the coming weeks, along with a short-dated cash management bill in late May "to meet peak liquidity needs" at the end of the month due to maturing coupons — which are interest-bearing securities.
Debt managers see "modest reductions" to short-dated bill auction sizes in June, followed by incremental increases in bills in July.
(Updates with analyst quote and projected funding shortfall starting in second paragraph after 'Funding Shortfall' subheadline.)
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