Market estimates that the US will reduce quarterly debt sales

The US Treasury will reduce its sale of long-term debt this month for the third consecutive quarter to better align its issuance with the government’s spending needs, according to most bond traders.

While that would mark the longest stretch of cuts since 2014-2015, it could well be the final reduction for some time, as the Federal Reserve is poised to reduce its holdings of US Treasuries by hundreds of thousands of dollars. million dollars by the end of the year. That contraction of the Fed’s balance sheet would eventually force the Treasury Department to increase its issuance.

On Wednesday, the Treasury will announce plans for its so-called quarterly redemption of long-term securities, when it normally also reveals any changes to its overall issuance strategy. Traders will be watching how debt managers intend to deal with the decline in the Fed’s bond portfolio, due to be released later in the day.

As for the quarterly redemption itself, next week’s auction total among carriers is widely expected to drop by $6 billion to $7 billion, compared to the $110 billion sold in February. That would mark a slightly smaller reduction than the $10 billion cut last time.

Debt management will be a juggling act for the Treasure in the coming months, not only because of the Fed’s so-called quantitative tightening, but also because of a boom in tax revenues that is inflating the department’s cash balance and reducing the fiscal deficit, for the time being.

“The confluence of the Fed’s balance sheet reduction and expectations of a lower deficit create some uncertainty regarding the Treasury’s strategy“, said Jonathan Cohndirector of rate trading strategy at Credit Suisse Group AG.

The quantitative adjustment of the fed “reduces the need for further coupon size cuts beyond the next quarter. However, our expectations of reduced financing needs still imply room this time for another round of significant cuts in the size of the nominal auction.”.

Coupons refer to interest-bearing securities and are distinguished from notes, which are shorter term and do not pay interest.

“We would not be surprised if auction sizes remain unchanged, nor would we be surprised if modest cuts are extended to terms of two to five years.”, wrote the strategists of Wells Fargo Zachary Griffiths and Michael Pugliese in a note.

The strategists of Wells Fargo estimate that the decrease in the balance of the fed it will increase the supply of the Treasury coupon market by nearly $1 trillion through the end of 2023. During that period, they forecast note issuance will increase by about $125 billion.

Most operators expect the Treasure try to keep the ratio of notes to total outstanding debt stable. Currently, investor demand for bonds outstrips supply.

A slight reduction in repayment would be in line with recommendations from the Treasury Loan Advisory Committee, a panel of major bond dealers and investors that deliberates with the Treasury. The Committee has advised keeping the Treasury note ratio in the 15%-20% range in future fiscal years. At the end of March, it was around 17%.

Traders forecast sales of Treasury Inflation-Protected Securities, known as TIPS, to rise again in Wednesday’s plans. The Government has been trying to increase TIPS as part of the outstanding debt.

The economists of Jefferies Thomas Simons and Aneta Markowska they are a small minority who estimate that there will be no change in next week’s auctions. For them, that is due, in part, to the expectation that the Treasury will want to avoid cutting sales only to have to increase them again as the quantitative tightening of the fed.