Monday, April 19, 2021

US plans record debt sale; no big changes before new stimulus

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The US Treasury held steady its planned issuance of longer-dated securities at a quarterly debt auction next week as the department awaits the result of the Biden administration’s push for a fresh coronavirus relief package.

The Treasury already boosted its so-called quarterly refundings in each of the last three quarters, and its stockpile of cash remains near an all-time high. With the outcome of President Joe Biden’s push for a $1.9 trillion stimulus bill uncertain, the department held off on tweaking its issuance of longer-dated securities.

Officials followed through on plans detailed in November to lift auctions of inflation-linked securities this year. The Treasury also said it will reduce bill issuance, which surged as it rushed to fund pandemic-related spending. The aim now is to bring the share of bills in the nation’s debt back toward historic norms.

The Treasury will sell $126 billion in long-term debt next week, broken down as follows:

  • $58 billion of three-year notes on Feb. 9, unchanged from January but $4 billion more than November
  • $41 billion of 10-year notes on Feb. 10, the same as last quarter
  • $27 billion of 30-year bonds on Feb. 11, unchanged versus November
  • The total amounts to $126 billion, or $4 billion more than the November refunding — a new record, thanks to moves the past two months boosting three-year note auctions
  • The refunding will raise $63.1 billion in new cash

The debt management team also said it won’t be expanding sales of any other tenors of nominal coupon-bearing debt over the quarter. Officials didn’t specify the amount by which bill supply will fall over the period. In August, the Treasury Borrowing Advisory Committee recommended allowing the share of T-bills to fall gradually to a range of 15% to 20% of outstanding debt — compared with nearly 24% now.

The majority of Wall Street bond dealers had predicted the Treasury would make no changes to nominal coupon-bearing debt auctions. Yet, given the reprieve from the onslaught of ever increasing long-term debt supply, the yield curve did flatten slightly after the announcement. The gap between five- and 30-year yields narrowed briefly, before widening back toward the widest since 2016.

The Treasury pushed forward with the initiative it started in January to increase sales of Treasury Inflation-Protected Securities compared with last year’s auction sizes:

  • It will lift by $1 billion the size of the February 30-year new-issue TIPS auction
  • The 10-year TIPS reopening also rises by $1 billion
  • The five-year new-issue TIPS sale in April also climbs by $1 billion

The department held off on making a decision on debt linked to the Secured Overnight Financing Rate, the heir presumptive to Libor as a benchmark for short-term dollar lending rates. The government has been analyzing the idea for months, and said Wednesday it “continues to actively explore the possibility” of SOFR-linked issuance.

Meantime, the Treasury is following through on expanded floating-rate note sales, after boosting its new-issue FRN last month by $2 billion. The reopenings planned for February and March will also rise by $2 billion each, bringing them to $26 billion per auction. No other FRN changes were announced.

On Monday, the Treasury as part of its quarterly borrowing estimates said it would reduce its cash balance to $800 billion by the end of March and to $500 billion by June, from about $1.6 trillion now.

The Treasury in 2015 instituted a policy of keeping the equivalent of at least five days’ worth of expenditures, or a minimum of $150 billion, in the cash account in case unexpected disruptions locked it out of debt markets. Before that, the Treasury kept enough cash for just two days. As budget deficits had begun to soar even prior to the pandemic, so has the size of the cash buffer.

Brian Smith, the Treasury’s deputy assistant secretary for federal finance, told reporters Wednesday that the 2015 cash-balance policy “still holds.”

“We are still looking to make sure we can meet any outflows in the case of a market disruption — generally targeting a week of outflows,” Smith told reporters. “It’s really the size of uncertainty related to the Covid-19 outbreak that has changed the situation” for now.

That cash balance will be drawn down over coming months in part by trimming bill issuance. The Treasury said it’s modifying the “cadence” of its shortest-dated securities, called cash management bills, or CMBs.

  • The 15-week and 22-week CMBs will cease after settlement on Feb. 16
  • The six-week and 17-week CMBs will continue at least through April
  • Other bill auctions could be boosted given the changes in CMB sales

Cutting the cash balance also gets the government ready for the risk of a protracted battle over the debt limit, with the current suspension set to expire at the end of July. By law, the Treasury has to shrink its cash to the level when the suspension was put in place, back in 2019.

“The debt ceiling looms large,” Zachary Griffiths, a rates strategist at Wells Fargo wrote in a note with his colleagues on Wednesday. Getting the cash balance down to the mandated level of roughly $120 billion “will be particularly challenging,” the group wrote.

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