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US Treasury to hold largest-ever bond auctions to plug budget deficit

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The US Treasury will hold some of its largest-ever debt auctions in the coming three months in an effort to fill the yawning federal budget deficit.

The Treasury said on Wednesday it would increase the size of auctions at most maturities for the next three months, with two-year and five-year auctions hitting record sizes. The five-year auction in April, for $70bn, would be the biggest ever for debt with a maturity of two years or more.

The US has been increasing its borrowing over the past few quarters, as the gap between government spending and tax revenue has grown. The federal deficit stood at $1.7tn last year.

However, the Treasury added that it expected this to be the last increase in auctions of so-called coupons — as longer term bonds are known — for a while. Treasury bills, which have a maturity of less than two years, do not offer regular coupon payments.

“Based on current projected borrowing needs, Treasury does not anticipate needing to make any further increases in nominal coupon or FRN [floating rate note] auction sizes, beyond those being announced today, for at least the next several quarters,” it said.

To meet its borrowing needs, the auction sizes of the two- and five-year notes will increase by $3bn a month, the same pace of increase as last quarter. After a bigger initial jump in February, the 10- and 30-year auctions will grow by $2bn and $1bn respectively.

In its quarterly refunding auctions next week, the Treasury department will sell $121bn worth of debt, roughly in line with the expectations of primary dealers.

Treasuries rose sharply in mid-morning trading in New York, with the two-year yield down 0.15 percentage points to 4.21 per cent. However traders attributed the moves to a lower than expected jobs number compiled by payroll processor ADP and jitters ahead of the Federal Reserve meeting later in the day.

Mike Riddell, a bond fund portfolio manager at Allianz Global Investors, said “supply dynamics are set to increasingly appear on investors’ radar in the lead up to the US election, not least because of the deficit increase on the back of [presidential hopeful Donald] Trump’s plans to take the corporate tax rate from 21 per cent to 15 per cent”.

However, investors are likely to welcome news that the Treasury does not expect to increase issuance again after this quarter, having faced three consecutive quarters of issuance increases.

“The good news is the projection that issuance has broadly peaked . . . The issuance story is still scary, but no more increases is a silver lining,” said Padhraic Garvey, head of research, Americas at ING.

The announcement comes just hours before the Fed’s policy meeting announcement, in which it is widely expected to keep interest rates at current levels.

Officials may address the bank’s quantitative tightening programme on Wednesday, after minutes from their last meeting showed some members had begun to discuss the possibility of an end to the policy.

The Fed is at present shrinking the size of its balance sheet, but could slow or end that process if market liquidity problems develop. The end of QT — alongside a halt to auction size increases — would alleviate some pressure on Treasury market investors to continue absorbing such high levels of debt.

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