Fewer Treasuries and liquidity issues – what to expect from the US refund

By Karen Brettell

(Reuters) – The U.S. Treasury Department is expected to announce this week that it will offer fewer Treasuries in the second quarter, after hitting its legal borrowing limit.

Any new indications as to whether the Treasury might resort to Treasury buybacks or make changes to its auction schedule for certain notes will also be the focus as market participants scramble to find the best ways to improve liquidity in the $24 trillion treasury bill market.

US Treasury Secretary Janet Yellen activated a second extraordinary cash management measure on Tuesday, after previously warning that the Treasury could run out of funds in early June if the US Congress does not approve an increase in the debt ceiling of $31.4 trillion.

Analysts expect the US government to be able to finance itself until July or even October, but there is a lot of uncertainty and how long it could depend on the proceeds of this year’s tax season.

Next week, the Treasury is likely to say it will reduce its issuance of Treasuries, debt that matures in a year or less, and reduce its cash balance to buy more time.

“Bill issuance is going to come down a lot in the second quarter. … They need to factor the debt ceiling into their funding estimates at this point,” said Angelo Manolatos, macro strategist at Wells Fargo.

The Treasury will give its funding estimate for the coming quarter on Monday and provide more details on its funding strategy on Wednesday.

It may also indicate that it will do more than reverse cuts in bond issuance when a deal to raise the debt ceiling is reached and a flood of debt is expected to hit the market.

This is because the US government wants to increase bills as a percentage of overall debt to achieve its long term goals.

“He’s trying to hoard the supply of bills, which got too weak last year when the Treasury was facing lower deficits due to pandemic-related spending,” said Meghan Swiber, US rates strategist. at Bank of America.


Analysts and market participants will also be watching whether the Treasury indicates that it will adopt proposals aimed at improving liquidity, which it has asked dealers about in recent quarters.

In the latest inquiry, the Treasury asked whether it should modify the auction schedules for two-, three-, five- and seven-year notes to include reopenings, as is often the case with longer-term debt.

This could increase liquidity and focus trading more on larger “on-the-run” issues, but it would come at the expense of “off-the-run” debt, said Benjamin Jeffery, interest rate strategist at BMO Capital. Markets.

So-called “running” issues are the newest and most liquid issues, while older “running” bonds have suffered the most liquidity problems when market conditions deteriorate.

Having larger note issuances over two years could reduce the number of times notes trade “special” in the repurchase deal market, Manolatos said, which happens when there’s a shortage of notes to borrow.

On the other hand, it could also require more active risk management by investors, as three months between issues, assuming two reopenings, is a significant change in duration for a relatively short maturity.

“Two months later, two years don’t have the same length,” Manolatos said.

BofA’s Swiber said Treasury buybacks, which the Treasury asked dealers about in a previous survey, are a better solution to boost liquidity during times of market stress.

These “allow the Treasury to manage Treasury liquidity more directly, to manage the stock of securities more directly and they can effectively buy back things that are cheap on the curve and help support liquidity in the most curve liquids as well,” she said. said.

An improving outlook for liquidity with less uncertainty over Federal Reserve policy compared to last year and more balanced supply and demand dynamics makes this matter less urgent, however, as the Treasury may include a discussion of possible takeovers, he is unlikely to make an official announcement. next week, Swiber said.

(Reporting by Karen Brettell; Editing by Alden Bentley and Jonathan Oatis)

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