A bronze Treasury seal is seen at the U.S. Treasury Department building in Washington, United States, on January 20, 2023. Portal/Kevin Lamarque/File Photo Acquire License Rights
NEW YORK, Oct 29 (Portal) – The U.S. Treasury is likely to increase the size of auctions for bills, notes and bonds in the fourth quarter when it unveils its financing plans this week to finance a worsening budget deficit, analysts said.
Investors are closely watching this week’s quarterly refund announcement as a sharp rise in long-term Treasury yields is partly due to concerns about the U.S. budget deficit. Since the end of July, the 10-year Treasury yield has risen by more than 100 basis points.
“The market has linked the rise in Treasury yields to deficit concerns, reflecting concerns about the sustainability of those deficits,” said Guneet Dhingra, managing director and head of U.S. interest rate strategy at Morgan Stanley in New York.
The budget deficit is increasing due to several factors, including higher federal government borrowing costs due to the Federal Reserve’s interest rate hikes and quantitative tightening.
Analysts at TD Securities expect the deficit to rise from $1.69 trillion this year to $1.85 trillion in 2024 and forecast another $677 billion in bonds due to mature come to market in a year or less, as well as about $1.7 trillion in notes and bonds. So far this year, the Treasury has issued about $1.6 trillion in additional notes and about $1.04 trillion in longer-term debt.
Also in focus is the announcement of borrowing estimates for the fourth quarter and first quarter of 2024 on Monday. It was the July 31 announcement of $1.007 trillion in third-quarter funding needs that unsettled the bond market and led to the sharp increase in auction volumes.
The Treasury will release its quarterly borrowing requirements on Monday at 3:00 p.m. ET (1900 GMT) and its repayment news on Wednesday at 8:30 a.m. ET (1230 GMT).
The Treasury Department is also likely to announce a buyback program, possibly in January, aimed at improving bond market liquidity, analysts said. The last time a regular buyback program was conducted in the early 2000s, it ended in April 2002.
SCHEWING SHORT END
The latest refund could cause the Treasury to distort its issuance of shorter-term debt, while the rise at the long end could decline due to concerns about the impact of the additional supply on long-term yields, analysts said.
That would be a departure from the refund in August, when the Treasury aggressively increased auction sizes for longer-dated notes and bonds after relying largely on sales of short-term notes to boost its cash holdings and finance its growing deficit Debt ceiling in June.
Morgan Stanley’s Dhingra, who expects the Treasury to rely on Treasury bills to fund its budget needs, said such a move could increase Treasury bills’ share of outstanding U.S. debt to about 22%. That’s slightly higher than the 15% to 20% range set by the Treasury Department.
Tom Simons, U.S. economist at Jefferies in New York, said the current market environment should support a higher share of government bonds for some time due to continued good appetite for shorter-term investments.
However, the projected rise in longer-term deficits in the coming years will continue to prompt the Treasury to increase auction sizes, analysts said.
“But the government doesn’t want to lean too heavily on the longer end of the curve to finance the deficit,” said Zachary Griffiths, senior investment-grade strategist at CreditSights in Charlotte, North Carolina, adding that there is a need . Risk balance approach.
Reporting by Gertrude Chavez-Dreyfuss; Edited by Megan Davies and Jamie Freed
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