U. S. Treasury Department may offer new Treasury bills this week
2023.01.30 09:08
U. S. Treasury Department may offer new Treasury bills this week
By Kristina Sobol
Budrigannews.com – After exceeding its statutory borrowing limit, the U.S. Treasury Department is likely to announce this week that it will offer fewer Treasury bills in the second quarter.
As market participants struggle to determine the most effective strategies for increasing liquidity in the $24 trillion Treasuries market, any brand-new indications regarding the possibility of the Treasury employing Treasury buybacks or altering its auction schedule for particular notes will also be the subject of intense interest.
After a previous warning that the Treasury could run out of funds in early June if the U.S. Congress does not approve an increase in the $31.4 trillion debt ceiling, U.S. Treasury Secretary Janet Yellen activated a second extraordinary cash management measure on Tuesday.
Analysts anticipate that the United States government will be able to finance itself through July or even October; however, there is a great deal of uncertainty regarding this, and the extent to which it will be able to last may be contingent on the proceeds from this year’s tax season.
The Treasury is likely to announce next week that it will cut back on the issuance of Treasury bills—debt with a maturity date of less than one year—and reduce its cash balance to buy time.
“Bill issuance is going to decrease significantly in Q2… Wells Fargo macro strategist Angelo Manolatos stated, “They have to incorporate the debt ceiling into their financing estimates at this point.”
On Monday, the Treasury will present its financing estimate for the upcoming quarter and provide additional information on its funding strategy.
When an agreement is reached to raise the debt ceiling and a flood of debt is anticipated to hit the market, it may also indicate that it will do more than just reverse cuts in bill issuance.
This is because the United States government wants to meet its long-term objectives by increasing bills as a percentage of overall debt.
Meghan Swiber, a U.S. rates strategist at Bank of America (NYSE:), stated:
“It’s trying to build up bill supply, which got too low last year when Treasury was facing smaller deficits on the back of the pandemic spending.”
Market participants and analysts will also be keeping an eye on the Treasury to see if it will act on the liquidity-improving proposals it has questioned dealers about over the past few quarters.
In the most recent survey, Treasury was asked if it should include reopenings in the auction schedules for notes with maturities of two, three, five, and seven years, as is the case with debt with longer maturities.
Benjamin Jeffery, an interest rate strategist at BMO Capital Markets, stated that although this would benefit “off-the-run” debt, it would hurt liquidity and concentrate more trading on larger “on-the-run” issues.
The most recent and liquid issues are referred to as “on-the-runs,” whereas older “off-the-run” bonds have experienced the greatest liquidity issues when market conditions have deteriorated.
According to Manolatos, the number of times the notes trade “special” in the repurchase agreement market – a condition that occurs when there are insufficient notes to borrow from – could be reduced by issuing larger two-year notes.
However, investors may need to be more proactive in managing their risk because three months between issues, assuming two reopenings, is a significant change in duration for a relatively short maturity.
Manolatos stated, “Two months later, a two-year doesn’t have the same duration.”
Swiber of BofA said that Treasury buybacks, which dealers were asked about in a previous survey by the Treasury, are a better way to increase liquidity during market stress.
She stated that these “allow Treasury to more directly manage Treasury liquidity,” “can effectively buy back things that are cheap on the curve, and help support liquidity in the more liquid parts of the curve as well,” and “allow Treasury to more directly manage the outstanding supply of securities.”
Although the Treasury may include a discussion on possible buybacks, Swiber stated that it is unlikely to make a formal announcement next week due to an improving liquidity outlook, less uncertainty over Federal Reserve policy compared to last year, and more balanced supply and demand dynamics.
