WASHINGTON: After Treasury Secretary Scott Bessent surprised dealers with his willingness to intervene in the bond market to drive down yields in recent months, Wall Street is now girding for the biggest revamp in guidance for US Treasuries issuance since early 2024.
Many dealers expect the Treasury to alter the guidance in its quarterly policy statement, which for more than two years has laid out steady plans for note and bond issuance.
A shift in tomorrow’s announcement could pave the way for potential cuts in 2027 to sales of the longest-dated debt, balanced by bigger auctions of bills and shorter-term notes.
Some are prepping for more drastic action. Citigroup Inc predicts the Treasury will announce cuts to sales of 20-year and 30-year bonds starting this month – effectively violating the guidance issued in the last so-called quarterly refunding statement.
Just one week after that last plan, Bessent unexpectedly ramped up buybacks of outstanding securities, in a move seen as a reaction to a surge in yields.
“Buybacks are too small to really move the needle,” April LaRusse, head of investment specialists at Insight Investment, said. She put it simply: “if you’re running the Treasury and your main power is issuance, if you don’t like where the yields are, you adjust your issuance.”
The proviso for any major shakeup this week is that yields have retreated since longer-dated rates hit their highest in more than two decades in early October.
Still, 30-year bonds last Friday were trading with yields above 5.3%, around levels seen in mid-August when Bessent intervened with his expanded buyback programme.
Another consideration: relying even more heavily on bills, which mature in up to a year, to meet expanding funding needs at some point is bound at some point to test the appetite of investors.
With rapidly maturing bills having to be refunded constantly, the United States now auctions in excess of half a trillion US dollars in any given week, leaving the Treasury exposed to sudden swings.
Last week, officials sold a record US$839bil.
“Guidance is more likely than immediate action” to alter issuance strategy, said Phoebe White, head of US rates strategy at UBS Group AG.
Still, the Treasury’s recent “unconventional” behaviour does “increase the odds that Treasury actions continue to deviate from historical precedent”, she said.
UBS is among those seeing no change in actual issuance until May.
The Treasury already opened the door to a shift in August, when officials made a subtle tweak to their guidance, saying they were evaluating potential future “changes” in coupon and floating-rate note sales instead of the previous reference to potential “increases”.
As for next week’s quarterly refunding auctions, unchanged issuance sizes would mean they will total US$125bil.
Ever since Bessent’s predecessor, Janet Yellen, established the current guidance about expecting to hold note and bond sales steady for quarters to come, dealers have expected increases to resume in time.
That’s due to the ever-increasing amount of public debt, with the government running annual deficits of around US$2 trillion. The Treasury was due to release its latest estimate of quarterly borrowing needs yesterday. — Bloomberg
