US Treasury Expected to Increase Auction Sizes Amid Growing Budget Deficit, Reports Reuters

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Analysts anticipate that the U.S. Treasury will increase the size of its auctions for bills, notes, and bonds in the fourth quarter as it reveals financing plans this week to address the expanding budget deficit.

Investors are closely watching this week’s quarterly refunding announcement, especially following a noticeable rise in long-term Treasury yields, which has been partly linked to worries about the U.S. fiscal deficit. Since late July, the yield on the 10-year Treasury note has surged by over 100 basis points.

"The market has connected the increase in Treasury yields with deficit concerns and reflects anxieties regarding the sustainability of these deficits," said Guneet Dhingra, managing director and head of U.S. rates strategy at Morgan Stanley in New York.

The rising budget deficit is influenced by several factors, including escalating federal borrowing costs stemming from the Federal Reserve’s interest rate hikes and its quantitative tightening measures.

Analysts at TD Securities forecast that the deficit will rise to $1.85 trillion in 2024 from $1.69 trillion this year. They also estimate an additional $677 billion in bills maturing within a year, alongside approximately $1.7 trillion in notes and bonds. To date, the Treasury has issued around $1.6 trillion in extra bills and about $1.04 trillion in longer-term debt this year.

Attention will be on the announcement of borrowing estimates for the fourth quarter and the first quarter of 2024, expected on Monday. The previous announcement on July 31, detailing $1.007 trillion in funding needs for the third quarter, unsettled the bond market, contributing to a significant increase in auction volumes.

The Treasury is set to disclose its quarterly borrowing requirements on Monday at 3 p.m. ET and its refunding updates on Wednesday at 8:30 a.m. ET.

Additionally, analysts suggest the Treasury may introduce a buyback program to enhance liquidity in the bond market, with a potential launch in January. The last regular buyback program was conducted in the early 2000s and concluded in April 2002.

SHIFTING FOCUS TO SHORTER-TERM BILLS

The upcoming refunding could see the Treasury favor shorter-term bills while decreasing issuance at the long end due to concerns regarding the impact of increased supply on long-term yields.

This would contrast with the August refunding, where the Treasury raised auction sizes for notes and bonds with longer maturities, relying heavily on short-term bills to finance its growing deficit during the debt ceiling suspension in June.

Dhingra from Morgan Stanley believes the Treasury may depend more on T-bills to meet its budget needs, potentially pushing the share of T-bills in outstanding U.S. debt to about 22%, slightly above the Treasury’s usual target range of 15% to 20%.

Tom Simons, a U.S. economist at Jefferies in New York, noted that the current market conditions support a higher proportion of T-bills due to a sustained interest in short-term investments.

Despite the projected increase in long-term deficits over the coming years, analysts expect the Treasury to continue raising auction sizes.

"However, the government is cautious about relying too heavily on the longer end of the curve for deficit financing," said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina, emphasizing the need for a balanced approach to risk.