Next hurdle for Treasuries is whether US keeps bond sales steady – BNN Bloomberg

(Bloomberg) — As the Treasuries market wavers about the U.S. economy’s resilience to future interest rate cuts, it also faces doubts about how much longer the U.S. government can avoid increasing its borrowing.

Even as the US continues to run historically large fiscal deficits, the Treasury Department has issued guidance since May that bond and bond auction sizes will remain unchanged “for at least the next several quarters.” The next so-called quarterly refund announcement is due on Wednesday.

Bond traders expect repo auctions to total $125 billion for the third straight quarter. The question is whether the “several blocks” instruction will remain. If it stays, that means any hike should be avoided until around mid-2025 at the earliest.

With neither former President Donald Trump nor Vice President Kamala Harris making deficit reduction a centerpiece of their campaigns, the trajectory of U.S. borrowing means an increase in long-term debt sales at some point is seen as inevitable.

“To say ‘a few quarters’ again seems like a pretty big commitment for the Treasury Department to repeat now,” said Thomas Simons, senior economist at Jefferies. “But they can.”

Some US debt auctions, including 10-year bond auctions, have already reached record highs. Any suggestion that a hike is imminent could further roil the bond market, where yields have risen sharply in recent weeks. Traders will also get an update on the Treasury’s broader borrowing needs on Monday after the release of its quarterly funding estimates.

“This forward-looking guidance is somewhat new from the Treasury in terms of recovery announcements,” said Phoebe White, head of U.S. inflation strategy at JPMorgan Chase & Co. “So it could spook the market if we change the guidance and see that language fall.”

JPMorgan along with companies including Citigroup Inc. and RBC Capital Markets, see no change Wednesday in either quarterly sales or forecasts. Wells Fargo, for its part, expects little change in wording, but not enough to rattle investors.

“We think the Treasury is likely to change its guidance on increasing coupons, but not in a way that suggests an increase is imminent,” said Angelo Manolatos, strategist at Wells Fargo.

But this time there is a wild card. On Wednesday, the Biden administration team announced the final refund.

New team

The next plan should be developed after the new president takes office. And some of Trump’s Republican supporters have publicly criticized Treasury Secretary Janet Yellen and her deputies for relying heavily on bills with maturities of up to a year to keep long-term securities selling and yielding. This suggests that the sale of bills may be reduced and the issuance of longer-dated bills increased if the Republican Party wins the White House.

Jefferies’ Simons said it was “strange timing — how important this guidance really is given that it’s ahead of a presidential election. There are many things that affect the outcome of the election.”

Keeping the status quo on issue sizes would result in next week’s refund auctions taking place at the following rates:

What Bloomberg intelligence says..

“The Treasury will not need to change its guidance, as it may even keep sales of coupon bonds stable over the next year. Given that the Treasury has already raised more than $1.6 trillion in fiscal 2025 under current issuance, there is no need for any adjustments unless there are unexpected costs that require funding.” »

—— Ira F. Jersey, Chief US Interest Rate Strategist

Even before any new team takes office, debt managers — who include career Treasury officials — will be fighting to reset the federal debt limit in early January. Unless Congress quickly suspends or raises the cap, the Treasury Department will have to begin an often-used process to give itself maximum room to continue payments.

“If the Treasury is under debt limit constraints after Jan. 1, they wouldn’t want to cancel the coupon offer,” said Blake Gwynn, head of U.S. interest rate strategy at RBC Capital Markets. “Therefore, it seems best to retain the ‘multi-quarter’ guidance of more stable auctions.”

One of the dynamics expected to help the department in the coming months is a further slowdown or even an end to the Federal Reserve’s quantitative easing program. QT assumes that a certain amount of Treasuries leaves the central bank’s balance sheet without replacement, and forces the Treasury to sell more debt to the public.

Investors will also be waiting for an update from the Fed at its November 6-7 policy meeting on the outlook for interest rate cuts. As the central bank kicked off its rate-cutting cycle with a 50-basis-point cut last month, Treasury yields rose as investors tempered expectations of how low policymakers will cut their benchmark at next meeting.

On Wednesday, dealers forecast that the Ministry of Finance will leave the issuance of debt obligations with a floating rate unchanged for the next three months. As for Treasury Inflation-Protected Securities, or TIPS, the department continues to increase sales. In its quarterly survey of dealers, the department asked whether it should consider adding three maturity TIPS to its current lineup.

–Assisted by Victoria Dendrin.

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