US trims quarterly debt sales, plans bigger cuts to 20-year bond

THE US Treasury reduced its quarterly sale of longer-term debt for a fourth straight time and laid out plans for cuts to a range of maturities in coming months, with the 20-year bond singled out for the biggest trimming.

The Treasury Department said in a statement in Washington that it will sell US$98 billion of long-term securities at its so-called quarterly refunding auctions next week - down from May's US$103 billion. It marks the longest string of declines in about 8 years.

Wednesday's (Aug 3) announcements are in line with what a majority of dealers had predicted. Also as anticipated, the department said it will ramp up issuance of Treasury bills, which have been in high demand as investors flock to short-dated instruments amid economic uncertainty. July will prove the low-point for bill supply for the year, the Treasury said.

Going forward, the Treasury gave no indication that further cuts to issuance of coupons - interest bearing securities - are in store. The Federal Reserve's continuing reduction of its holdings of Treasuries is putting the onus on the government to borrow more from private-sector buyers, leaving less room for such auction cuts.

"Treasury believes these reductions announced today leave Treasury well-positioned to address potential changes to the fiscal outlook," the department said. "Depending on future developments in projected borrowing needs, Treasury will consider whether adjustments in future quarters may be appropriate."

As expected by dealers, the Treasury also announced it will keep boosting sales of inflation-linked debt. That's as debt managers continue to work to stabilise TIPS, as they are known, as a share of total marketable debt outstanding.

Next week's quarterly refunding auctions break down as follows:

• US$42 billion of 3-year notes on Aug 9, compared with US$45 billion at the May refunding and US$43 billion at the July auction
• US$35 billion of 10-year notes on Aug 10, compared with US$36 billion last quarter
• US$21 billion of 30-year bonds on Aug 11, versus US$22 billion in May
• The refunding will raise US$43.9 billion in new cash

The Treasury also detailed cuts to nominal debt of other maturities over coming months, with the full breakdown laid out as follows:

• Sales of 2-year, 3-year, 5-year and 7-year notes will each be trimmed by US$1 billion per month over the next 3 months
• The new and reopened 20-year bond auction sizes will be scaled back by US$2 billion, starting in August
• Both the new and reopened 10-year note auction sizes will be trimmed by US$1 billion, starting in August
• Both the new and reopened 30-year bond auction sizes will be reduced by US$1 billion, starting in August

Some dealers had predicted even bigger reductions for the 20-year bond, given demand that's been so low as to contribute to that security yielding more than both 10-year and 30-year Treasuries.

Twenty-year bonds showed some mild underperformance relative to its surrounding maturity peers in the initial wake of the refunding details being released. Some strategists had been calling for even larger cuts to the 20-year bond, which had stoked some buying of the security over the past few days.

The Treasury said that feedback from market participants showed that slightly larger cutbacks to the 20-year than for other securities "would improve the structural supply and demand balance" for that bond. But the department was also told "it was important to ensure benchmark liquidity size."

Joshua Frost, the assistant secretary for financial markets, reiterated the Treasury's commitment to the 20-year bond in comments to reporters on Wednesday, while indicating its initial issuance size was too big.

"We introduced the 20-year a little over 2 years ago to provide significant additional financing capacity," Frost said. "At the time, the size was larger than the market had originally expected. We've gotten some feedback that the supply-demand balance" could be improved, he said. With the series of cuts that have now been made, "we are at just about half the size we were last summer," he said.

As for TIPS - Treasury Inflation-Protected Securities, which compensate holders for increases in consumer prices - issuance plans are as follows:

• 5-year TIPS October new issue increased to US$21 billion
• 10-year TIPS September reopening size boosted to US$15 billion
• 30-year TIPS August reopening maintained at US$8 billion

"Treasury will continue to monitor TIPS market conditions and consider whether subsequent modest increases would be appropriate," the department said.

Separately, the Treasury Borrowing Advisory Committee, a group comprising dealers, investors and other stakeholders, did an analysis of the idea of US debt managers conducting regular buyback operations for the first time in roughly 2 decades to reduce illiquidity in non-benchmark securities.

And as for bills, the Treasury said its current projections show that July will be the low-point for outstanding supply. Debt managers have already boosted bills outstanding by US$77 billion since then, and anticipate further lifting that by nearly US$100 billion by the end of September.

In line with previous plans, the Treasury expects its first benchmark 4-month bill auction to be announced Oct 18 and conducted the next day. BLOOMBERG