By Wolf Richter for WOLF STREET.
The US Treasury Department today released data to what extent it will boost the issuance of Treasury notes (maturities of 2 years to 10 years) and Treasury bonds (20 years and 30 years), and it starts in August. This oncoming flood of supply at these coupon auctions is a doozie.
So far, Treasury has funded the huge gigantic deficits and the refilling of its checking account, the Treasury General Account, by selling at auction a torrent of Treasury bills (1 year or less) and Cash Management Bills (short-term bills with maturities ranging from a few days to months). But now comes the supply of longer-term notes and bonds.
It starts in August, when Treasury will sell $270 billion in notes and bonds, up by $24 billion from July ($246 billion). The Treasury Department said in its Quarterly Refunding Statement today:
“Treasury plans to increase auctions sizes by slightly larger amounts in certain tenors in order to maintain the structural balance of supply and demand across tenors. Treasury will evaluate whether similar relative adjustments are appropriate when determining auction size changes in future quarters.”
Next week, Treasury will increase the auction size of notes and bonds by $13 billion from July, to $103 billion:
- 3-year notes: $42 billion, +$2 billion from July
- 10-year notes: $38 billion, +$6 billion from July
- $30-year bonds: $23 billion, +$5 billion from July.
The $103 billion in issuance next week will replace $84 billion in notes and bonds that mature on August 15. The additional $19 billion in issuance will be needed to fund the new deficits; it’s that additional $19 billion that will increase the total debt.
Later in August, Treasury will sell $167 billion in notes and bonds, up by $11 billion from July
- 2-year notes: $45 billion, +$3 billion from July
- 5-year notes: $46 billion, +$3 billion from July
- 7-year notes: $36 billion, +$1 billion from July
- 20-year bonds: $16 billion, +$4 billion from July
- FRN (Floating Rate Notes): $24 billion, unchanged
“Treasury plans to increase auctions sizes by slightly larger amounts in certain tenors in order to maintain the structural balance of supply and demand across tenors. Treasury will evaluate whether similar relative adjustments are appropriate when determining auction size changes in future quarters,” the Treasury Department said in the announcement.
In September, Treasury will increase its issuance of notes and bonds also by $24 billion from July, to $270 billion.
In October, Treasury will increase its issuance of notes and bonds by $35 billion to $281 billion.
The issuance of TIPS (Treasury Inflation-Protected Securities) will be increased starting in October with the 5-year TIPS new issue auction. It will be boosted by $1 billion to $22 billion.
Over the next 12-month, Good Lordy.
Treasury should jack up its monthly issuance of the seven main notes and bonds (not including TIPS and FRNs) by nearly 60% over the next year, to $354 billion in August 2024, from what it issued in July 2023 ($222 billion), according to “Neutral Issuance” scenario in the presentation by the Treasury Borrowing Advisory Committee (TBAC).
These quarterly projections could be subject to hefty increases over the next quarters, as we have seen today. The chart shows the projected monthly combined issuance of 2-year notes, 3-year notes, 5-year notes, 7-year notes, 10-year notes, 20-year bonds, and 30-year bonds:
This is a tsunami of notes and bonds that is going to flood the market. And it is occurring while the Fed, under its QT program, is letting about $60 billion a month in maturing Treasury securities roll off the balance sheet without replacement.
With the Fed reducing its holdings, that tsunami of notes and bonds being issued will have to find buyers, and those buyers will have to be enticed by yields.
Yield solves all demand problems. If the yield is high enough, just about anything will sell. So it’s not that Treasury won’t be able to sell those notes and bonds, but at what yields it will have to sell them, and yield investors are already licking their chops.
The scenario is further clouded by inflation, which, once it breaks out to this extent, has a nasty tendency to serve up bad surprises, and bond investors hate inflation and want to be paid for it. Compared to the tsunami of issuance coming our way in this inflationary environment – partly fueled by this huge deficit spending from the government – the Fitch downgrade of the US credit rating to AA+ from AAA is just decoration.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.