The Treasury Department is expected to make a final increase in the amount of longer-dated bonds it plans to sell, aiming to maintain a regular and predictable schedule. This decision comes after a period of volatility in the bond market.
Every quarter, the finance manager of the U.S. government releases a debt-sale plan that outlines the long-, medium-, and short-term bonds it intends to sell in the upcoming three months. Historically, traders have paid little attention to these plans. However, this changed when the borrowing limits for longer-dated debt were raised for the first time in two years in August. This led to a significant rise in yields, reaching 5% in 2023, as investors became concerned about the market’s ability to absorb the increasing supply of government securities amidst a growing government deficit.
These concerns were valid. Traders were already on edge after experiencing substantial losses in their bond portfolios in 2022 and witnessing a wave of bank failures last spring due to unrealized losses on their bond investments. The prospect of higher rates in conjunction with a flood of new bonds from the Treasury unsettled the markets.
Fortunately, the situation has improved. Yields have decreased since the end of 2023, following the Treasury’s decision in November to reduce the increase in 10-year and 30-year auctions. The lower-than-predicted supply of long-term bonds is positive news as it instills confidence in demand and keeps yields lower. This outcome is beneficial not only for the millions of Americans seeking mortgages but also for credit card and car loan rates.
Treasury Announces Plans for Changes in Notes and Bonds
Wednesday’s announcement at 8:30 a.m. Eastern may calm things further. Many strategists at big banks—from BMO Capital Markets to JP Morgan to Deutsche Bank—largely expect the Treasury to follow through with its November guidance in announcing the third and final round of changes in the composition of its notes and bonds. It is expected to increase the purchases of long-term bonds by the same amount as it did in the previous quarter.
Consistency in Treasury Guidance
Historically when the Treasury “gives us guidance that it’s setting off on a series of changes to its auction sizes, it tends to deliver the same round of changes in each quarter,” says Jay Barry, co-head of US Rates Strategy at J.P. Morgan. “Regular and predictable borrower is one of its core tenants.”
A similar pace of increase would mean a $2 billion increase over the prior quarter for the 10-year note whereas a 30-year sees a $1 billion increase. Meanwhile, medium-term notes such as 2-year and 5-year would see a $3 billion increase each month from February’s level until April.
Record Amounts of Debt Offered to Investors
To be sure, private investors will be left with massive amounts of debt. With the new increases, there will be record amounts of 2-, 3-, 5- and 10-year debt offered to investors at coming auctions, a byproduct of a large government deficit.
Differing Views on Securities Increases
Not everybody shares the same prediction. Michael Cloherty of UBS expects the increases in 2-, 3-, 5-, and 10-year securities to be lower than in the previous quarter.
Cloherty’s rationale is that the Treasury can manage with more issuance of T-bills, or debt with lesser than one-year maturity, as there remain demands for them.
Of course, if the Treasury does something unexpected, that could rattle markets.
Barry of J.P. Morgan thinks that’s unlikely. Refunding days are “one of my favorite days of the year” but it’s rare to see them so market moving because “I don’t think the Treasury likes to be in the business of generating volatility.”
