U.S. Treasury expected to boost bond sales amid worsening deficit, soaring rates
The U.S. Treasury Department is expected to increase issuance of longer-dated bonds starting this week and likely to continue the trend into next year as the fiscal deficit rapidly deteriorates and interest rates soar.
The U.S. Treasury Department will increase issuance of longer-dated debt in its quarterly refinancing operation for the first time since early 2021, to $102 billion from $96 billion, according to consensus among traders. Although not as high as the record high during the new crown epidemic crisis, it is well above the pre-epidemic level.
When the plan is announced on Wednesday, debt management is also expected to increase the size of regular issuance of bonds of all maturities, with the possible exception of varieties that are in relatively low demand, or in relatively small increments. Traders will also be watching for updates on the bond buyback program.
Demand for public borrowing has risen due to factors such as the Federal Reserve raising interest rates to 22-year highs, which in turn pushed up Treasury yields. The Fed is also reducing its holdings of U.S. debt. These factors raise the risk of greater price volatility when governments sell bonds.
“There’s going to be a significant increase in supply,” said Mark Cabana, head of rates strategy at BofA. “We’re surprised by the deficit and the data is alarming.”
Traders’ consensus expectations for the refinancing operations plan are as follows:
On August 8, $42 billion in 3-year bonds
On August 9, $37 billion in 10-year bonds
August 10, $23 billion in 30-year bonds
On top of that, most traders expect issuance to rise by $2 billion each for most maturities, with many citing smaller increases in seven-year and 20-year notes, which had previously been in poor demand.
Some traders believe the 20-year will be the only one that remains unchanged in size. Since the U.S. Treasury Department relaunched the bond in 2020, it has been plagued by weak pricing and liquidity.