Less long-term debt and more likely bills in Treasury financing plans

The flag of the United States flies atop the United States Treasury Department in Washington November 18, 2008. REUTERS/Jim Bourg

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July 29 (Reuters) – The U.S. Treasury Department is expected to announce it will continue to cut some of its Treasury coupon debt issuance when it announces its funding plans for the coming quarter on Wednesday, pending further a declining deficit.

It may also raise hopes that Treasury bond issuance will increase as the Federal Reserve shrinks its balance sheet, as short-term investors grapple with a shortage of near-term debt.

The Treasury has reduced the size of its Treasury debt auctions since late last year, after increasing them to unprecedented sizes in 2020 to pay for COVID-19-related expenses.

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“Expected deficits have come down, the Treasury needs to reduce the pace of issuance accordingly,” said Jonathan Cohn, head of rates trading strategy at Credit Suisse in New York.

Analysts are divided on the number of maturities likely to be reduced for the third quarter, with some seeing reductions on the Treasury curve, while others expect cuts only for longer-term maturities and /or at seven and 20 years old.

Seven-year and 20-year Treasury bills are trading at relatively higher yields, which has caused dislocations in the Treasury yield curve. Yields on twenty-year bonds, for example, are higher than those on 30-year bonds, while seven-year yields trade above those on 10-year bonds.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, said the Treasury Bonds Advisory Committee (TBAC), which releases a presentation with the announcement of the redemption on Wednesday, should focus on the request for 20 year bonds.

He noted, however, that the issues with maturity are tied to trading in the secondary market, with demand for the bonds being strong at auctions. Lyngen expects 20-year yields to stay higher than 30-year bond yields until the Fed starts cutting rates, which would steepen the yield curve, but he added that was little. likely in the short term.

Meanwhile, the Treasury is likely to signal that it will increase Treasuries issuance in the coming months as it offsets the Fed’s dip in buying, which is letting more bonds off its balance sheet in the coming months. as part of its efforts to normalize monetary policy. .

After beginning quantitative tightening in June and slowly increasing in size, the Fed will let $95 billion in bonds mature in September, including $60 billion in Treasuries and $35 billion in mortgage-backed debt. .

An increased supply of Treasuries should help ease an imbalance that has left money market investors struggling with a lack of safe, short-term assets to buy.

“The supply of bills should start to increase over the next few months,” said Gennadiy Goldberg, interest rate strategist at TD Securities in New York, noting that this should also reduce demand for the credit agreement facility. Fed reverse buyout, which sees daily demand. over $2 trillion.

TD expects net issuance of treasury bills to increase by $525 billion in fiscal 2023, which begins in October, following a decline of $173 billion in 2022 and a decline of 1. 32 trillion dollars in 2021.

This compares to expectations that net coupon issuance will increase by $1.08 trillion in fiscal 2023, after increasing by $1.87 trillion in 2022 and $2.73 trillion in 2021.

Credit Suisse’s Cohn noted that an increase in bond issuance and reductions in coupon-bearing debt should also help rebalance the composition of Treasury debt to be more in line with recommendations from the TBAC, which advises the government. on its borrowing strategy.

Treasuries in circulation fell to the low of the TBAC’s recommended 15-20% of total debt, he said. “By increasing the supply of notes, the Treasury would more thoughtfully spread the supply burden as QT rolls out to investor bases with appropriate liquidity,” Cohn said.

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Reporting by Karen Brettell; Editing by Alden Bentley and Nick Zieminski

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