The US Treasury will initially disclose the details of the next three months of note and bond auctions on January 31. The scale is expected to continue to increase as it faces higher financing needs in the context of increased social security spending and interest rate costs.

The amount of two-year and five-year treasury bonds issued each month by the US government has peaked. On Tuesday and Wednesday, the US Treasury sold a total of 60 billion US dollars of two-year notes and 61 billion US dollars of five-year notes, the highest levels in their respective history. The largest treasury bond auction ever worth $62 billion is a seven-year treasury bond sold between January and October 2021.

November 2023 was the last time the US Treasury announced the quarterly auction scale. At the time, officials anticipated that “it may be necessary to increase the scale of bond issuance for another quarter,” which indicates that the two-year and five-year issuance scale will reach new highs. If November's increase is repeated next quarter, then the April 5-year treasury bond auction amount will reach 70 billion US dollars, an increase of 63% over the same period last year.

Furthermore, the largest 10-year treasury bond auction in history may also be held from February to April this year. The Treasury may increase the size of most treasury bond auctions, with the exception of 20-year bonds, as investors generally have less demand.

William O'Donnell (William O'Donnell), an interest rate strategist at Citigroup, said that during the economic expansion period, “there is absolutely no precedent for the speed and extent of the increase in the supply of US debt.” He said that there is currently enough demand to absorb the growing supply, and the sharp decline in yield since October is evidence. “However, if inflation does not continue to progress and the market's hopes for interest rate cuts are even partially dashed, the supply of US bonds will become a problem and may accelerate the rise in inflation.” Due to the expectation that the Federal Reserve will start cutting interest rates this year, US Treasury yields have dropped by about 1 percentage point.

The increase in the supply of US debt is driven by the federal budget deficit (including an increase in interest expenses on existing debt) and the Federal Reserve's policy of reducing US debt by 60 billion US dollars a month, but the Fed's downsizing process is expected to end this year.

However, the growth rate of bond issuance is expected to slow down for the rest of the year, which may give a sigh of relief to investors who have been worried about increased supply. They will also focus on whether the Treasury's borrowing estimate is higher or lower than its previous forecast of $816 billion.

A report by Goldman Sachs analyst Bill Zu (Bill Zu) of January 17 said that globally, a similar situation will cause the supply of public debt in major developed economies to “remain at a high level this year and beyond.” He said that while this may put upward pressure on yields, the sensitivity of yields to public debt has declined over time, partly due to increased global private sector savings.

However, not all treasury bills and bonds are close to record sizes, and total issuance volumes will continue to fall below the peak level reached by the US federal government during its response to the pandemic in 2021. As the crisis subsided, the Ministry of Finance reduced the size of auctions in late 2021 and 2022, specifically cutting the amount of less popular notes and bonds, such as seven-year notes and 20-year bonds. The size of the latest seven-year notes sold on Thursday was 41 billion US dollars, still down one-third from the highest point.

Editor/Corrine