US Debt-Sale Plan Seen Benefiting From Fed That ‘Stops Hurting’

(Bloomberg) — The US Treasury is set to keep its sales of long-term debt steady in a new plan this week, with the government expected to get relief soon from the Federal Reserve’s rapid run-down in its securities holdings.

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Dealers anticipate the Treasury on Wednesday will follow through on its January guidance of holding off on further increases in its so-called quarterly refunding auctions — which are now approaching the record sizes seen in the Covid crisis. That would mean $125 billion in auctions of longer-term securities next week.

Borrowing requirements have escalated thanks to a gaping federal budget deficit and the Fed’s quantitative tightening program — which has seen up to $60 billion of Treasuries run off the central bank’s balance sheet, forcing the government to sell more to private-sector buyers. The Fed will offer an update on its plans Wednesday, after officials in March suggested they soon could slow the pace of QT.

The Treasuries market could use the help.

US government bonds were heading for their biggest monthly loss since 2022 as of Thursday’s close, hit by hot inflation data that sharply curtailed expectations for Fed interest-rate cuts and by bloated auction sizes. Sales of longer-dated securities surprised traders two weeks ago with weak demand despite higher yield levels.

“I’m not so sure if all this helps Treasuries as much as it stops hurting them,” said Michael Pugliese, senior economist at Wells Fargo & Co., referring to Fed QT tapering and a stabilization in Treasury debt-sale plans. “Issuance is still really high and we are learning — a little in real time — how well these auctions will be digested.”

Pugliese is among a number of Fed watchers who expect the central bank to announce that QT tapering will start in June. Chair Jerome Powell, who’ll hold a press conference after the Fed’s policy decision Wednesday, said in March the tapering process would start “fairly soon.”

QT Focus

Underscoring investors’ focus on supply, the Treasury Department’s quarterly financing estimates, due for release Monday afternoon in Washington, have received increasing attention. With solid jobs and economic growth, tax receipts lately have come in strong, improving the near-term deficit picture. In January, officials penciled in $202 billion in net borrowing for the three months through June.

Debt managers have been keenly watching the Fed’s plans, and queried dealers on their own expectations for Fed QT in a survey ahead of the refunding statement — which comes several hours ahead of the Fed’s release.

Tom Simons, a senior economist with Jefferies, predicts the Fed will slash in half its roll-off of Treasuries, beginning immediately after Wednesday — taking it to a pace of up to $30 billion a month. Simons said it’s unclear whether the Treasury’s debt managers will factor likely Fed QT changes into Monday’s quarterly financing estimates.

Where relief is unlikely to come for now is on the interest-rate front. With the federal government’s debt-servicing costs on course to reach a record high as a share of GDP next year, high inflation readings mean Powell and his colleagues are unlikely to be signaling rate cuts for the coming months.

Rate Debate

Swaps traders are pricing in only about 33 basis points of Fed rate reductions for all of 2024, compared with more than six quarter-point cuts expected at the start of the year. The Fed is seen on Wednesday keeping its policy-rate range steady at 5.25% to 5.50% — where it’s been since last July.

“The biggest language change is going to come from the messaging from Powell during the press conference,” said Lindsey Piegza, chief economist for Stifel Financial Corp. “This is where he’s really going to have the opportunity to backpedal some of that optimism for a near-term rate cut. Inflation data, while we’re not going to overreact to it, has been moving in the wrong direction.”

That leaves investors contending with hefty auctions in a still-inflationary environment.

Auction sizes for several tenors just reached new records. With yields right across the maturity spectrum not being far from 5%, investors have preferred shorter-dated Treasuries, as seen in sales last week that went off with little issue. But demand for 10-year notes earlier this month was viewed as abysmal, while that for 30-year bonds was lackluster.

On tap for next week will be 3-, and 10-, and 30-year auctions, which make up the refunding group.

A $125 billion plan this time around would mean the following upcoming refunding auction sizes:

  • $58 billion of 3-year notes on May 7

  • $42 billion of 10-year notes on May 8

  • $25 billion of 30-year bonds on May 9

New three-year notes are auctioned monthly, and those were already lifted by the Treasury by a total of $4 billion in March and April.

Dealers expected sizes of floating-rate debt to also be held stable over the coming three months.

Treasury Inflation-Protected Securities, or TIPS, sales are the only type of debt forecast by dealers to see some increases. HSBC Holdings Plc expects the Treasury to lift only the June reopening auction of five-year TIPS, by $1 billion. At JPMorgan Chase & Co., their strategists see bumps to TIPS coming via a $1 billion increase to the July new-issue of the 10-year maturity.

Dealers also see US debt managers starting a shift away from relying on bills, which mature in up to a year and don’t pay interest. As a share of total debt, bills exceeding the 15% to 20% range the Treasury Borrowing Advisory Committee, a panel of market participants, has advised. That’s also given that the Treasury has room to reduce its cash balance, which now sits at over $900 billion.

Read more: Wall Street Sees Fewer T-Bills in April Amid Beefy Tax Season

Dealers on Wednesday will also be on watch for the exact date for a long-awaited Treasury program to buy back existing debt. The initiative is designed in part to support market liquidity, and also to help with cash management — smoothing out some of the swings in bill issuance related to lumpy tax revenues.

Most dealers expect the first buyback operations to be in May. The Treasury last conducted buybacks between March 2000 and April 2002.

Bond investors will also have a heavy slate of economic data to contend with over the week. There will be reports related to housing, consumer confidence and manufacturing activity, but top of mind for investors will be more insights on the state of the US labor market. Job openings for March will be of interest, but most important will be Friday’s release of nonfarm payroll figures for April.

As far as Fed speak, besides Powell on Wednesday, New York Fed President John Williams and Chicago Fed President Austan Goolsbee will speak Friday.

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