By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Analysts predict that the U.S. Treasury will increase the size of auctions for bills, notes, and bonds in the fourth quarter to address a worsening budget deficit. This announcement is eagerly awaited by investors, as concerns about the U.S. fiscal deficit have contributed to a sharp increase in long-term Treasury yields. Since the end of July, the 10-year yield has risen by more than 100 basis points.
Guneet Dhingra, Managing Director and Head of U.S. Rates Strategy at Morgan Stanley in New York, noted that the rise in Treasury yields is connected to deficit concerns and reflects worries about the sustainability of those deficits.
The budget deficit is growing due to various factors, including higher federal government borrowing costs resulting from the Federal Reserve’s interest rate hikes and quantitative tightening.
TD Securities analysts project that the deficit will expand to $1.85 trillion in 2024 from $1.69 trillion this year. They also anticipate an additional $677 billion of bills maturing within a year, as well as approximately $1.7 trillion in notes and bonds. So far this year, the Treasury has issued about $1.6 trillion of additional bills and roughly $1.04 trillion in longer-term debt.
Monday’s announcement of borrowing estimates for the fourth quarter and the first quarter of 2024 will also generate significant attention. The bond market was spooked by the announcement on July 31 of $1.007 trillion in funding needs for the third quarter, leading to a substantial increase in auction volumes.
The Treasury will release its quarterly borrowing requirements on Monday at 3 p.m. ET (1900 GMT) and its refunding news on Wednesday at 8:30 a.m. ET (1230 GMT).
Analysts also expect the Treasury to announce a buyback program aimed at enhancing bond market liquidity, with a potential launch in January. The last regular buyback program was conducted in the early 2000s and ended in April 2002.
SKEWING SHORT-END
Analysts suggest that the upcoming refunding will see the Treasury favor shorter-term bills, while potentially reducing longer maturities. This adjustment reflects concerns about the impact of increased supply on long-term yields.
During the August refunding, the Treasury significantly increased auction sizes for notes and bonds, which have longer maturities. However, it primarily relied on the sale of short-term bills to raise cash and finance the growing deficit amid the debt ceiling suspension in June.
Morgan Stanley’s Dhingra expects the Treasury to continue relying on T-bills to meet its budget requirements. He believes this may push the percentage of T-bills as a share of outstanding U.S. debt to around 22%, slightly higher than the Treasury’s typical range of 15% to 20%.
Tom Simons, U.S. economist at Jefferies in New York, believes that the current market environment will support a higher percentage of T-bills for some time due to continued demand for shorter-term investments.
Analysts state that the projected increase in longer-term deficits in the coming years will necessitate further increases in auction sizes.
“However, the government does not want to heavily rely on the longer end of the curve to finance the deficit,” noted Zachary Griffiths, Senior Investment Grade Strategist at CreditSights in Charlotte, North Carolina, emphasizing the need for a balanced approach to risk.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Megan Davies and Jamie Freed)
