On Monday, the US announced less borrowing than the Treasury had previously forecast and bonds have been bid since with 10-years briefly falling below 4% earlier today. That esetimate was $760 billion compared to $811 billion forecast by the Treasury in October due to lower borrowing costs and higher tax receipts.
- 2 year $63b vs $63 billion expected
- 3-year $54b vs $53-$54 billion expected
- 5-year $64b vs $64 billion expected
- 7-year vs $40 billion expected
- 10-year $42b vs $42 billion expected
- 20-year $16b vs $16 billion expected
- 30-year $25b vs $25 billion expected
- Supply for next week $121b vs $121 billion expected
- Given current fiscal forecasts, Treasury expects to maintain bill auction sizes at current levels into late-March.
These ‘expectations’ are soft estimates from a limited number of sources.
The Treasury said it will conduct a limited amount of buyback operations in April and that it will modestly reduce short-dated bill auction sizes going into tax filing season.
There are no surprises here. There was some angst the Treasury would lean harder on the long end because that’s what they promised to do but Monday’s borrowing estimate dulled that fear.
Commentary in the minutes of the Treasury Borrowing Advisory Committee:
Deputy Director Katzenbach reviewed primary dealers’ expectations for coupon issuance. Primary dealers generally expected increases in nominal coupon issuance identical in magnitude and distribution to the increases implemented at the November refunding; dealers also expected continued increases in bill supply. Most dealers expected that coupon size increases announced at the February refunding would be the last needed in the near-term, while uncertainty about the pace and duration of balance sheet normalization could be addressed via changes in bill supply.
Debt Manager Chisholm then discussed primary dealers’ 2024 outlook for money markets and Treasury bill demand. Dealers broadly expected that the Federal Open Market Committee (FOMC) will reduce policy rates during 2024; there was likewise a broad consensus among dealers that the Federal Reserve would reduce the pace of SOMA redemptions in the coming year. Dealers noted that, all else being equal, lower SOMA redemptions would reduce Treasury’s net privately-held borrowing needs. As such, dealers anticipated this would likely result in fewer Treasury bills being issued to private market participants, given the role of bills as Treasury’s issuance “shock absorber.” By contrast, dealers cautioned that lower short-term interest rates may present headwinds for Treasury bill demand during 2024 by reducing the relative attractiveness of money market funds and short-term investments. However, dealers expressed confidence that money market funds would not face significant outflows and would continue to be a meaningful investor in both Treasury bills and Treasury repurchase agreements throughout 2024.
There was also some talk about the basis trade, which is what blew up the Treasury market in March 2020 and still hasn’t been properly addressed:
The presenting member proceeded to describe how leveraged funds are typically short the futures that asset managers are long as part of the cash-futures basis trade. The presenting member discussed the estimated size of those positions and the typical leverage used by leveraged funds. The presenting member concluded by noting associated risks and recommending potential metrics for Treasury to monitor as well as potential areas of future study.