Source: Golden Ten Data
The huge budget gap means that the era of large-scale auctions of treasury bonds will continue, but the Federal Reserve's QT pace will be a key influencing factor.
Wall Street generally anticipates that the US Treasury will announce a final increase in the issuance of long-term bonds this week. The scale of future issuance will be closely related to the Federal Reserve's quantitative austerity program.
The market expects the US Treasury Department to implement its November guidelines on Wednesday, the third round of quarterly refinancing auctions for additional notes and bonds. This will bring the total issuance of refinancing bonds to $121 billion, not far from the record scale during the COVID-19 crisis. This $121 billion offering plan means that the upcoming refinancing auctions will be as follows:
Issuance of US$54 billion 3-year notes on February 6
Issuance of US$42 billion 10-year notes on February 7
Issuance of $25 billion 30-year bonds on February 8
Among them, the 3-year and 10-year circulation increased by 2 billion US dollars, and the 30-year circulation increased by 1 billion US dollars, which is the same as the November plan. New three-year treasury bonds are auctioned every month, and the total amount of auctions in December and January has increased by $4 billion.
As the Federal Reserve is expected to slow down or stop reducing its holdings of US debt, the US debt management department is expected to get rid of its dependence on the private sector to absorb financing needs. Nevertheless, the huge budget gap means that the era of large-scale auctions of treasury bonds will continue. Jason Williams (Jason Williams), a global market strategist at Citigroup, said when talking about US debt:
“In almost any case, the US Treasury must maintain the current level of bond auctions for the next 12 to 18 months... If cut too soon, the ratio of treasury bills to total debt will not fall back to a more ideal level.”
Those responsible for debt management under US Treasury Secretary Yellen turned to notes maturing in one year or less last year to cope with growing demand for loans due to the Federal Reserve's quantitative austerity and deficit. Currently, notes account for about 22% of outstanding debt held by the public, which is beyond the 15% to 20% range recommended by the Ministry of Finance's advisory panel.
Benjamin Jeffery (Benjamin Jeffery), an American interest rate strategist at BMO Capital Markets, said that if the Fed ends QT early and causes overfinancing, this year it may be offset by cutting the issuance of short-term treasury bonds. He also said he doubts this will be the last increase in the size of refinancing auctions.
Anshul Pradhan (Anshul Pradhan), head of US interest rate strategy at Barclays Bank, said that since QT is likely to end early, the increase in refinancing in January will be slightly smaller than in November. He also stressed that “the scale of auctions for some periods has reached the peak level during the pandemic”. Although the long-term yield has declined from the October high, it is still higher than the level of the first half of last year.
But there are also different opinions. Stephen Stanley (Stephen Stanley), chief economist at Santander Bank of America Capital Markets LLC, predicts that after this week, there will be at least one round of increase in the size of auctions. He believes that this is necessary due to the prospect that the fiscal deficit will continue to expand until 2026 and that the Federal Reserve will continue to implement quantitative austerity policies throughout this year.
In recent months, the price of US bonds has risen due to bets that the Federal Reserve will switch to cutting interest rates this year, which has now allayed people's concerns about large-scale federal bond issuance. However, when the Treasury Department announced in August last year that it would increase the scale of refinancing for the first time in more than two years, the market was still worried about the increasing burden of US debt. The Treasury's refinancing increase in November was less than expected, which was seen as an acknowledgement of investors' anxiety.
On Wednesday, the US Treasury will also explain in detail the changes in the debt issuance plan for the next three months. Some traders expect that the scale of issuance for each term will increase again, with the exception of 20-year bonds. Sales of inflation-protected treasury bonds (TIPS) are also expected to increase.
Meanwhile, the Ministry of Finance is expected to provide further details on plans to repurchase some of its existing securities on Wednesday. The plan aims to improve cash management and enhance the liquidity of existing treasury bonds (those that are no longer the benchmark). Most traders expect officials to give a specific launch date.
Steven Zeng (Steven Zeng) of Deutsche Bank pointed out that the timely launch of the program will help prepare for the April tax filing deadline, which is beneficial to the Ministry of Finance. At that time, the Ministry of Finance's revenue surges, which usually causes a temporary decline in the scale of note issuance.
editor/tolk