US Treasury Yields Decline Amid Slower Auction Increases for Long-Dated Debt, Reports Reuters

By Karen Brettell

The U.S. Treasury Department announced on Wednesday that it will reduce the pace of increases in its longer-dated debt auctions for the upcoming quarter from November 2023 to January 2024. Additionally, the Treasury indicated that it anticipates needing one more quarter of increases thereafter to satisfy its financing requirements.

Following this announcement, Treasury yields declined, as the increases were not as substantial as some had anticipated. The U.S. government also revised its borrowing estimate for the October-December quarter to $776 billion, which is $76 billion lower than the prediction made in July.

Benchmark yields dropped approximately 8 basis points on the day, falling below 4.8% for the first time in two weeks. The Treasury has been increasing auction sizes to accommodate a growing budget deficit, influenced by higher government spending and rising interest payments on federal debt due to the Federal Reserve’s interest rate hikes and measures to tighten monetary policy.

The revision of Monday’s borrowing estimate was partly due to the influx of income tax payments from states that were previously deferred because of natural disasters.

“It wasn’t as bad as feared. The guidance that there may be only one more quarter where it increases was somewhat comforting,” commented Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

The announcement came just before the Federal Reserve’s decision to maintain interest rates, putting further downward pressure on yields. The Fed’s policy statement acknowledged the unexpected strength of the U.S. economy while recognizing that businesses and households are facing tighter financial conditions.

This contrasts with the previous quarter, when the U.S. government projected a borrowing estimate of $1.007 trillion for July-September, which was $274 billion higher than an earlier estimation and resulted in a significant sell-off in bonds.

In light of current conditions, the Treasury has increased supply primarily in short- and intermediate-dated auctions, while making more modest increases in longer-dated debt that has experienced the most significant declines recently.

The Treasury’s adjustments were described as “an effort to calm the panic in bond markets,” by Bruce Clark, macro strategist at Informa Global Markets in New York. He noted that prior announcements had intensified concerns in the bond markets.

The Treasury plans to raise the sizes of its 10-year new issues and reopenings by $2 billion, down from $3 billion at the last refunding, and will increase its 30-year bond new issues and reopenings by $1 billion, a reduction from the previous $2 billion increase. The auction sizes for 20-year bonds will remain unchanged after an increase of $1 billion last quarter.

The auctions for two-year and five-year notes will see increases of $3 billion per month, while the three-year and seven-year note auctions will rise by $2 billion and $1 billion, respectively.

Joshua Frost, Treasury assistant secretary for financial markets, stated that the decision to slow the growth of longer-dated securities was based on expected borrowing needs and the structural demand for Treasury securities, all aimed at funding the government at the lowest cost over time.

Frost did not provide insights on future revenue projections.

In its quarterly refunding planned for next week, the Treasury aims to sell $112 billion, including $48 billion in three-year notes, $40 billion in 10-year notes, and $24 billion in 30-year bonds. The government will also expand its two-year floating rate note new issue and reopenings by $2 billion.

Some Treasury Inflation-Protected Securities (TIPS) auction sizes will be increased, with an additional $1 billion for the December five-year TIPS auction and the January ten-year TIPS auction.

The Treasury expects to implement “modest reductions” to short-dated bill auctions by early December, which will likely remain at current levels through mid-January. Bill auctions are scheduled to continue at these levels until late November.

Frost acknowledged there is “robust demand” for bills and that they are likely to exceed the 15-20% share of federal debt advised by the Treasury Borrowing Advisory Committee over the next three months. He also mentioned that there are considerations to adapt the regular six-week cash management bill to a benchmark, with an announcement expected at the next refunding. The Treasury continues to make “significant progress” toward launching a regular buyback program in 2024.