(Bloomberg) -- The US Treasury said it's keeping an eye on rising demand for the shortest-dated federal securities — from both the Federal Reserve and the private sector — but still offered no tilt on Wednesday toward trimming sales of notes and bonds.
In its so-called quarterly refunding statement Wednesday, the department said it anticipated keeping auction sizes unchanged for nominal notes, bonds and floating-rate notes, "for at least the next several quarters." US debt managers have been using that same forward guidance for two years now.
It also said that, looking ahead, it "continues to evaluate potential future increases to nominal coupon and FRN auction sizes, with a focus on trends in structural demand and potential costs and risks of various issuance profiles." Coupons are interest-bearing securities and FRNs are floating-rate notes.
That eye to boosting such auctions down the road comes even as the Treasury is "monitoring" the Fed's expanded purchases of bills, which mature in a year or less. The central bank in December said it would buy $40 billion a month of them until April, in an effort to ensure ample reserves in the banking system. And the department is keeping an eye on "growing demand for Treasury bills from the private sector."
The overall message from the Treasury was "very much steady-as-she-goes," as John Canavan, lead analyst at Oxford Economics, put it.
Disappointed Reaction
Some traders telegraphed disappointment, after speculation ahead of the statement that officials might take steps to bring down longer-term borrowing costs. Ten-year yields hit their highs of the session after the Treasury's release, and were around 4.29% at 9:17 a.m. in New York.
"There seemed to be elevated expectations coming into the refunding announcement, with some people expecting a more forceful debt management approach which they didn't get," said Steven Zeng, an interest-rate strategist at Deutsche Bank. "Higher long-end yields and tighter swap spreads are consistent with the disappointment."
The department has for some time relied on bills to fund the steadily increasing amount of federal spending. Any immediate move to cut sales of bonds, or 10-year notes — Treasury Secretary Scott Bessent's key financial metric — would have run against the department's long-standing pledge to be "regular and predictable" in its debt management. Bessent himself invoked that language in a speech in November.
As for next week's refunding auctions, they will total $125 billion, made up of:
$58 billion of 3-year notes on Feb. 10
$42 billion of 10-year notes on Feb. 11
$25 billion of 30-year bonds on Feb. 12
The refunding will raise new cash of approximately $34.8 billion, the Treasury said.
Turning to inflation-linked debt, known as TIPS — Treasury inflation-protected securities — the department said it's keeping auction sizes at current levels. That follows a long period during which officials had been boosting some sales in order to keep the TIPS share of the overall market steady.
Dealers were divided on what officials would do ahead of the statement, with some seeing no change in TIPS while several anticipating at least one of the coming quarter's three TIPS auctions to be increased.
As for the immediate outlook for bills, the Treasury said it "expects to maintain the offering sizes of benchmark bills at or near current levels into mid-March." After that it anticipates incrementally paring those back ahead of the April 15 tax filing due date – around which it typically receives an influx of cash.
"These reductions will likely lead to a cumulative $250-300 billion net decline in total bill supply by early May," the Treasury said.
Fed's Role
The Fed's current scale of bill purchases reduce "the risk of Treasury oversupplying" the market with more bills than investors are prepared to handle, Morgan Stanley strategists led by Martin Tobias wrote in their refunding preview.
Beyond April, the Fed's plans are unclear, however — all the more so given Kevin Warsh's nomination to become the next chair in May. Warsh has in the past advocated shrinking the Fed's securities portfolio.
Because of the government's continuing outsize fiscal deficits — of almost $2 trillion a year — and due the waves of maturing medium-term securities in coming years — most dealers see the Treasury as having to boost coupons at some point. When that happens, many see officials favoring the shorter or intermediate term rather than long bonds.
Diminished investor demand for the likes of 30-year bonds round the world has prompted governments in Europe and Japan to reduce issuance of such securities, raising questions about whether the US might do the same.
TBAC's Thoughts
The Treasury Borrowing Advisory Committee, an outside panel of dealers, investors and other market participants, in its own statement Wednesday nodded to that trend overseas. There has been in some cases a "shift to shorter issuance from those respective debt management offices," the TBAC said.
TBAC panel members debated the "relative tradeoffs of increasing auction sizes more gradually, perhaps earlier than needed, compared to a more accelerated path of auction size increases when the financing gap is larger."
The panel continued to regard that increases in interest-bearing debt sales could be warranted in the fiscal year that begins in October, it said.
"Bessent has made it an explicit priority to keep longer duration yields down — so as long as he remains the secretary, I expect the size of any issuance increases late this year or next year will be biased toward durations of five-years or less," Canavan said.
--With assistance from Elizabeth Stanton.
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