WisdomTree Minds on the Markets
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Minds on the Markets
WisdomTree
Minds on the Markets
Archive: November 6, 2023
Go Fund Me
What a week for the markets! A Fed meeting, a jobs report and the next thing you know, the Treasury (UST) 10-Year yield is down 40 basis points (bps).
Is that all to the story, though? Of course not. There is another aspect we need to highlight, and that is the quarterly Treasury refunding announcement. Each calendar quarter, the nation’s debt managers provide the public with their most recent borrowing estimates and how they plan on funding them. While these announcements usually go under the radar, the two latest quarterly briefings did capture the Treasury market’s attention.
Back in August, the Treasury surprised investors by announcing a larger-than-expected boost in the size of upcoming UST coupon auctions and also stated that further increases for the fourth quarter would more than likely be needed. This added supply influx has been cited as one of the drivers behind the UST 10-Year yield making a run at the 5% threshold.
Thus, with much anticipation, last week’s refunding announcement was being watched very carefully to see if the debt managers would follow through on their aforementioned projections of further supply increases. The answer was yes, but the boosts did not rise to the market’s worst fears. Just for the quarterly refunding itself, which consists of auctions for a new 3-, 10- and 30-year maturity, the Treasury raised the refunding size by $9 billion to $112 billion, or below the consensus estimate of $114 billion.
However, that masked the other part of the announcement that, other than the 20-year bond, the debt managers were increasing the sizes of every other coupon auction (including floating rate notes) anywhere from $1 billion to $3 billion per month. How about some perspective? For just the 2-, 3-, 5- and 7-year notes, the totals will rise by a combined $27 billion by January. While the UST 10-Year appeared to be applauding this refunding announcement, if you look a little bit further under the hood, you will find that a total of $114 billion of this maturity will be offered over the next three months, a $15 billion increase from the $99 billion tally as recently as the May/July period.
What we find somewhat curious is that Treasuries reacted positively to a refunding total that came in $2 billion less than expected, but meanwhile, coupon auction sizes are still being boosted in the tens of billion dollars through January. Oh, and did we mention the debt managers also stated that “one additional quarter of increases to coupon auction sizes will likely be needed”? In other words, more Treasury supply increases will probably be on the docket through April of next year.
We’ll be the first ones to acknowledge that supply is typically not a primary driver for Treasury yields; the economy, inflation and monetary policy are. Nevertheless, continued increases in the number of Treasuries being auctioned and higher sovereign debt rates abroad do not offer a very attractive landscape either. As a result, investors may require a more enticing yield come auction time.
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