The US announced a record $112 billion quarterly refunding on Wednesday, a total that eclipsed the majority of dealer estimates.
The breakdown shows Treasury’s desire to term-out the country’s financing as the US looks to “pay for” expensive virus relief packages credited with averting economic oblivion for millions of Americans.
Dealers were looking for $108 billion for next week’s 3-, 10- and 30-year sales. Treasurys slid to day lows as the long-end responded to larger coupon supply. 10-year, 20-year, and 30-year auction sizes will rise by $6 billion, $5 billion, and $4 billion, respectively.
“Treasury was pleased with the results of the 20-year nominal bond auction in May and the subsequent reopenings in June and July”, the statement reads, striking a chipper note. “As expected, demand for this tenor is strong and market participants have provided significant positive feedback on the security”.
Obviously, America’s financing needs are poised to remain elevated as more stimulus comes online. On Monday, ahead of the refunding statement, Treasury cited an assumed $1 trillion of additional borrowing “in anticipation of legislation being passed in response to the COVID-19 outbreak”. Fast forward to Wednesday, and Treasury says its borrowing needs in the current quarter “will ultimately depend on the final provisions of the additional legislation”.
Steve Mnuchin has been knee-deep in negotiations with Democrats for the better part of the last two weeks.
Wednesday’s statement confirms what everyone already knew — namely that the funding mix is shifting. “Treasury will continue to shift financing from bills to longer-dated tenors over the coming quarters, using long-term issuance as a prudent means of managing its maturity profile and limiting potential future issuance volatility”, the statement says.
“The latest auction performance has clearly increased confidence inside the US Treasury that sharp increases in auction sizes will be met with strong demand”, BMO’s Jon Hill remarked.
This means Mnuchin will be outrunning (if you will) Jerome Powell, which was one of the rationales behind persistent calls for a steeper curve (those calls got a bit quieter in July as the 5s30s flattened the most on a monthly basis since 2017).
All of this is subject to considerable uncertainty. The total size of the next virus relief package was, as of Wednesday, undecided.
Democrats were angling for $3.5 trillion (the HEORES Act), while Republicans’ hodgepodge of separate bills released last week summed to “just” $1 trillion.
As discussed at length here on Tuesday, a compromise will surely entail a figure larger than $1 trillion. That would appear to create considerable ambiguity around America’s actual borrowing needs going forward.
Of course, this entire discussion needs to be considered in the context of the Fed’s willingness to accommodate whatever Congress decides to spend. Powell and his colleagues have been explicit about the need for additional fiscal stimulus. Given that, it would be bizarre (to say the least) if they allowed increased coupon supply to trigger a disorderly rise in yields. In other words, while the Fed settled on a set pace of Treasury purchases at the June meeting, that was an “at least” figure. It can always be raised if circumstances warrant.
Between that, and the laundry list of additional factors one could cite in arguing that long-end US yields will remain biased to the downside (e.g., the safe-haven appeal, a deflationary global economic backdrop, weakness in the incoming data stateside, etc.), you might be inclined to suggest that any selloff/ steepening tied to the record refunding plan will be faded.
Unless of course Nancy Pelosi manages to negotiate for a final number on stimulus that comes in considerably higher than what might be construed as a “compromise”.