U.S. Treasury to keep auction sizes unchanged in coming quarter as debt limit weighs
The U.S. Treasury said on Wednesday it plans to maintain coupon issuance across all maturities through April, but debt limit constraints may force it to rely more heavily on short-term cash management bills as it executes a $96 billion debt refunding and ramps up borrowing.
Brian Smith, Treasury's assistant secretary for federal finance, said the debt issuance plan assumes Congress will lift the debt ceiling and provides "sufficient flexibility" to deal with uncertainties over coming tax revenue and payment obligations.
The department announced it will sell $40 billion in U.S. three-year notes, $35 billion in 10-year notes and $21 billion in 30-year bonds next week. The auctions will raise new cash of $28.9 billion and refund roughly $67.1 billion of privately held Treasury notes and bonds maturing on Feb. 15.
The Treasury said on Monday it expects to borrow $932 billion in the first quarter, far higher than the October estimate of $353 billion due to a lower cash balance at the beginning of January and projections of lower receipts and higher outlays for the period.
Treasury's total first half-borrowing estimate of $1.2 trillion is well beyond the remaining headroom under extraordinary cash management measures activated by Treasury Secretary Janet Yellen in January.
The estimate underscores the high stakes for an initial meeting between President Joe Biden and House of Representatives speaker Kevin McCarthy on Wednesday to discuss debt issues.
The department repeated previous guidance that cash and extraordinary measures are unlikely to be exhausted before early June but has warned that a default on U.S. payment obligations would rattle the U.S. economy and financial markets.
Until Congress lifts the $31.4 trillion borrowing cap, "debt limit constraints will lead to greater-than-normal variability in benchmark bill issuance and significant usage of CMBs (cash management bills), the Treasury Borrowing Advisory Committee (TBAC) said in a statement to Yellen. CMBs often carry short maturities of days or weeks.
The Treasury also announced that it intends to maintain the February auction size of reopened $30-year Treasury Inflation-Protected Securities (TIPS) at $15 billion, the size for the March auction of reopened 10-year TIPS, and the April auction size of the new five-year TIPS.
DEALERS RAISE CONCERNS
The TBAC, made up of banks, broker-dealers, asset managers and hedge funds, also said that past debt limit standoffs had pushed the outstanding stock of bills and Treasury's cash balance down to "undesirable levels."
"Abrupt declines in bills outstanding, reductions in cash balances below Treasury's prudent policy level, and any broader uncertainty about Treasury's financing capacity are detrimental to the Treasury market and should be avoided," the committee report said.
It urged Congress "to raise or suspend the debt limit with all due haste," adding that failing to do so is "a reckless and inappropriate approach to managing fiscal policy and may jeopardize Treasury market functioning and increase costs to the taxpayer."