The $102 billion Treasury bond auction is anticipated by traders

With the deficit reaching $1.39 trillion, a 'sobering' 170% rise, traders are preparing for a $102 billion auction of Treasury bonds.

This week, the US Treasury will start issuing more long-term bonds because the budget deficit is getting worse quickly, and interest rates are increasing; this is expected to continue into next year.

Dealers agree that the Treasury will raise its quarterly refunding of longer-term Treasuries from $96 billion to $102 billion. This is the first time since early 2021 that this will happen. Even though it's not as high as it was during the Covid-19 disaster, that's still much more than before the pandemic.

After Wednesday's news, debt managers are likely to raise regular auction sizes for securities across the yield curve, with possible exceptions or smaller increases for less popular notes. Dealers will watch for news about an upcoming plan to buy back older Treasuries.

The amount of money the government needs to borrow is going up. This is partly because the Federal Reserve has been raising interest rates, which has increased its policy target to a 22-year high. This has caused yields on government debt to go up, making it more expensive. The Fed is also getting rid of some of the Treasuries it owns, which means the government will have to sell more of them to other buyers. All of this makes it more likely that there will be more significant swings in instability when the government sells its bonds at auction.

"There's just a lot of supply coming," said Mark Cabana, the head of US interest-rate strategy at Bank of America Corp. "The deficit numbers have shocked us, and they're scary."

Larger amounts of debt have yet to directly lead to lower prices and higher yields, as shown by the fact that the US debt has grown while yields have been at their lowest levels in history. But bigger bidding sizes can make short-term volatility more likely at a time when banks are less interested in creating markets. This was clear at a sale for seven-year bonds on Thursday, where buyers wanted a more significant discount to buy the bonds.

The Fed's rate hikes and inflation, which is a crucial factor in making the budget gap bigger, are what have caused yields to go up. In the first nine months of the fiscal year, the cost of taking care of the US government's debt rose by 25% to $652 billion. This is part of a worldwide trend that is driving public borrowing.

Cabana and his team think that the Treasury will increase sales of coupon-bearing debt, another name for notes that pay interest, not only this month but also in November and February when new policies for managing debt will be announced.

For the upcoming refunding auctions, this is what most sellers think will happen:

On August 8, $42 billion worth of 3-year notes were sold.

On August 9, $37 billion of 10-year notes were due.

On August 10, $23 billion in 30-year bonds were sold.

Aside from these sales, most traders expect a $2 billion increase in issuance for most maturities. However, many expect smaller increases for 7- and 20-year Treasuries, which have had times when they were not in high demand.

Some sellers think that the size of the 20-year bond will stay the same. Since the Treasury revived that security in 2020, its price has been low, and it has been hard to sell.

"There should be well-distributed auction increases across the curve," said Subadra Rajappa, head of US interest rates strategy at Societe Generale SA. He also said that the 7- and 20-year debt should see slightly smaller increases. "There is only one way for the obligation to go over the next ten years, and that is up. Treasury wants to be sure that they have enough money for the next few years.

In the first nine months of the current fiscal year, the government deficit reached $1.39 trillion, 170% higher than last year. This shows that the Treasury needs more money than ever. On Monday, the department raised its estimate of how much it will need to borrow in the quarter from July to September from $733 billion in early May to $1 trillion.

In the meantime, the Fed is getting rid of up to $60 billion worth of Treasuries every month by not replacing securities that come due. Last week, Fed Chair Jerome Powell said that the portfolio runoff could continue at some pace even after officials started cutting interest rates. This meant the so-called "quantitative tightening" programme might last longer than most people thought.

The amount of short-term debt, like bills that are due in less than a year, is another factor that Treasury managers need to think about. The Treasury Borrowing Advisory Committee, which is made up of buyers and sellers in the market, has long recommended a range of 15% to 20% for this number.

The Treasury has been selling a lot of bills lately to make up for the fact that it ran out of cash during the fight over the debt limit earlier this year, which put it in a dangerously low state.

The team at Citigroup Inc. said that they would be looking for things like the planned T-bill share of debt this week.

Buybacks and Bills

In a note to clients, Jabaz Mathai, head of the Group of 10 rates strategy at Citigroup, said that the Treasury needs to make bidding sizes much bigger in November and February. He also noted that the rate of increase in the last quarter would be "faster than the rate of issuance after Covid."

Another thing to keep an eye on is any change to the Treasury's plans for buybacks. These plans were first shown in May after months of planning. One reason for buying back older bonds and putting out more current standards is to help make the Treasuries market more liquid. Another goal is to make sure that the release of T-bills isn't too volatile.

The programme is set to start next year, but traders think that the Treasury is still working out the details. In their poll questions, before they got their money back, the department asked them about it again.