US: Treasury Refunding Announcement

May 3, 2017 07:30 CDT

There were no surprises in the Treasury's announcement of the quarterly refunding of $49.7 billion with a $62 billion issuance package that will raise $12.3 billion in new cash. As in the previous 5 quarters, the refunding package consists of $24 billion in 3-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds. The Treasury plans to maintain coupon issuance at current levels over the coming quarter, with the balance of seasonal borrowing needs to be met by changes in weekly T-bill auctions and the issuance of cash management bills. Funding needs will also be met by the May 10-year Treasury Inflation-Protected-Securities (TIPS) reopening auction, the June 30-year TIPS reopening auction, the July 10-year TIPS auction, and the regular monthly 2-year Floating Rate Note (FRN) auctions.

The Treasury said it is studying the possibility of issuing ultra-long bonds with a maturity longer than 30 years, and will provide an update on the potential for ultra-long issuance following the review at a future refunding meeting.

With regard to the March 2017 Federal Open Market Committee (FOMC) minutes signaling possible changes in the Federal Reserve's reinvestment policy for its SOMA portfolio, which could have an impact on the Treasury's marketable borrowing over the coming years as the Federal Reserve ceases to reinvest some or all of its maturing Treasury securities, the Treasury said it would likely need to increase the amount of borrowing to fund these SOMA redemptions. The additional borrowing needs would probably be met by raising Treasury bill and Treasury nominal coupon auction sizes. The Treasury will give further guidance to market participants regarding such changes in auction size if and when greater detail concerning the timing and magnitude of any potential plan by the Federal Reserve for SOMA redemptions becomes available.

The Treasury in its statement also urged Congress to increase or suspend the statutory debt limit as soon as possible, noting that the Treasury has been taking extraordinary measures to finance the government on a temporary basis since March 15, when the suspension of the debt limit by the Bipartisan Budget Act of 2015 expired. The Treasury expects to exhaust these measures sometime in the second half of 2017.

Each quarter the U.S. Treasury announces its funding needs for the next two quarters. The announcement includes which securities will be offered and the dates of their announcement, auction and settlement.

Bond market players pay attention to this release so that they know the degree of looming supply of Treasuries coming onto the market so that they can evaluate what appropriate yields might be for trading. Heavy supply coming onto the market suggests higher yields.