WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
Is Record Treasury Supply Much Ado about Nothing?
ARCHIVE: Week of February 12, 2024
To cut or not to cut…at least not too early. That’s the message the Fed is trying to get through to the U.S. Treasury (UST) market. Obviously, the money and bond markets’ aggressive rate cut expectations were not to the Fed’s liking, and pushback has finally been forthcoming from the policy maker. While this debate and how it impacts where UST yields will be ultimately headed in 2024 will certainly continue to play out, there is another issue that has received headlines over the last few months that is not going away anytime soon either: record Treasury supply.
Recently, we’ve been getting asked the question about Treasury supply and its potential effect on rates. It is a very interesting question, to say the least. While this development can, at times, seem to be a primary force on UST yields, historically, supply tends to be more of a secondary or tertiary force. However, this factor can add to a trend that is already underway, seemingly underscoring its importance.
The reason why we are addressing this issue in another weekly is the fact that we mentioned above…it is not going away anytime soon. With the U.S. government running baseline trillion-dollar deficits, increased Treasury supply has arguably become part of the permanent bond market landscape until budget developments reverse course. Unfortunately, according to the latest estimates from the Congressional Budget Office (CBO), trillion-dollar deficits are projected to run through the next decade into 2034.
Yes, we know projections that far out are definitely what the markets like to call “subject,” but still, once the spending side of the budget ledger gets entrenched, it is hard to reverse course. And that’s not even taking into account the revenue side of that ledger. For the record, the overall deficit for fiscal year (FY) 2023 came in at $1.7 trillion and, according to the CBO projections, will basically remain around this level through 2027 before reaching $2.6 trillion in 2034. To put this into some perspective, rising red ink is not a totally new phenomenon, as the deficit pre-COVID-19 hit $984 billion in FY 2019. But even that number was still just a little more than half of the current tally.
Back to what this means for the UST market…record auction sizes. Last week certainly highlighted this development at the Treasury’s February quarterly refunding, where new 3-, 10- and 30-year maturities were offered. Focusing on the bellwether 10-Year note, the auction size for this latest offering came in at $42 billion, a record amount and $15 billion higher than the new issue pre-COVID-19. For those keeping track, that is a 55% increase.
This increasing trend in auction sizes is slated to continue into Q2. In fact, the projected size of the upcoming 2- and 5-Year Treasury note auctions in April will rise to an incredible $69 and $70 billion, respectively, both breaking the all-time record of $62 billion for the 7-Year when it was auctioned in 2021.
According to the nation’s debt managers, Treasury “does not anticipate needing to make any further increases” after that. But that begs the question: are these auction sizes then here to stay?
Thus far, the Treasury offerings were relatively well-received, at least at last week’s refunding anyway. While we do not envision any scenario that includes a “failed” auction, it does make us wonder if UST yields are going to need to stay around current levels, at a minimum, in order to attract investor demand.
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