NEW YORK: Treasury Secretary Scott Bessent’s debt-management team rebuffs Wall Street suggestions to tweak its guidance for future sales of US treasuries for so long now that many dealers have abandoned predicting a change anytime soon.
Ahead of a quarterly policy statement on debt strategy today, most dealers see the Treasury reiterating it expects no increases in note and bond issuance “for at least the next several quarters”.
That forward guidance dates back to the Biden administration, and was once criticised by Bessent as designed to tamp down longer-term borrowing costs ahead of the November 2024 election.
Today, it’s President Donald Trump’s Republicans facing midterm elections, with every interest in avoiding any further climb in yields, the potential result of any signal of increased auction sizes.
Yields on 30-year bonds last week hit their highest levels since 2007, making them so costly compared with shorter maturities that many dealers doubt the Treasury will boost their sales at all in coming years.
Bessent since taking office has relied on bills, which mature in up to a year, to meet the government’s increasing borrowing needs.
As their rates are lower, that’s helped temper the Treasury’s costs.
But the strategy comes with risks: continuing to lean on bills means debt-servicing costs become sensitive to front-end rate shocks, at a time when investors are betting the Federal Reserve will be forced to tighten monetary policy over the coming months.
“It behooves Treasury to open up some optionality” by tweaking its guidance, said Blake Gwinn, head of US rates strategy at RBC Capital Markets.
“This would come with the risk of pushing up yields. But this shift will come sooner or later, and waiting longer may only increase the perceived importance, and market impact, of its eventual removal.”
Economists see the federal budget deficit running at roughly a US$2 trillion pace for years to come, which means the government will have to borrow an ever-increasing amount.
The department on Monday boosted its estimated borrowing needs for the current quarter, lifting it to US$739bil from the US$671bil it had penciled in back in May.
That’s mainly due to lower projected net cash flows, it said in a statement.
The Treasury kept an end-September cash balance estimate of US$950bil.
Bank of America Corp calculated that, if the Treasury keeps issuance of coupons, or interest-bearing securities, stable through the 2027 fiscal year, the T-bill share of outstanding debt would hit nearly 25%, the highest since 2004 after leaving out the Covid and global financial crisis shocks.
Since the last refunding in May, dealers have pushed out the date by when they anticipate the Treasury will boost coupon sales, with many gravitating towards May 2027.
As for next week’s so-called quarterly refunding auctions, unchanged issuance sizes would mean they will consist of: As time goes on, the scale of maturing debt means that current auction sizes wouldn’t be able to raise fresh cash for the Treasury.
JPMorgan Chase and Co analysts see a “funding gap” beginning to emerge in fiscal 2027, which starts Oct 1.
They tally a cumulative gap from 2027 to 2030 of US$3.7 trillion. — Bloomberg
