Evening Brief – 01.31.24

The Treasury Department announced in its latest quarterly refunding that it is increasing the size of its issuance of long-term debt for the third time in a row, to $121 billion, and that it “does not anticipate needing to make any further increases in nominal coupon or (Floating Rate Note) FRN auction sizes, beyond those being announced today, for at least the next several quarters.”

Treasury will sell $54 billion 3-year notes (up from $52 billion), $42 billion 10-year notes (up from $37 billion), and $25 billion 30-year bonds (up from $21 billion) next week, following the rhythm of increases announced during the previous refunding announcement in November.

Treasury also intends to increase the new issue and reopening auction sizes for the 10-year note and the 30-year bond by $2 billion and $1 billion, respectively, while keeping the 20-year bond new issue and reopening auction size same.

Respite from future increases in auction sizes for longer-term securities may underpin demand for Treasuries. For several months, investors have been particularly attentive to news about the overall quantity of federal debt, as the Federal Reserve has steadily reduced its own holdings of US securities.

Concerning Treasury Bills, which Treasury used to fund much of the budget deficit in late 2023 when it funded deficit spending using the Reverse Repo drain (whose proceeds were used to fund T-Bill issuance), Treasury said it “expects to maintain bill auction sizes at current levels into late-March,” with modest reductions by then until early April, during the tax-filing season. Treasury expects this to result in a $300 to 350 billion net increase in bill supply over the following two months.

Prior to the announcement, most dealers expected Treasury to limit bill issuance if it found itself with lower borrowing needs in the coming quarters. That comes after debt managers leaned significantly on T-Bills in recent months, with their share of overall debt exceeding the Treasury Borrowing Advisory Committee’s long-established 15% to 20% level.

Compared with the previous two quarterly refunding announcements, which resulted in a spike in yields after the first one and a decrease in yields after the second one, today’s announcement was basically in line with expectations.