On 31 January, the Treasury released its Quarterly Refunding Statement, which announced it would be offering record sales to refund approximately $105.1bn of privately-held Treasury notes maturing on 15 February 2024.
According to the Treasury, this issuance will raise new cash from private investors of approximately $15.9bn. The move will involve a triple phased sale of 3-, 10- and 30-year notes this month, totalling $121bn overall.
The 3-year notes were sold for the amount of $54bn, maturing 15 February 2027, a 10-year note for $42bn which matures on 15 February 2034; and finally a 30-year bond of $25bn, maturing 15 February 2054.
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The 3-year note was auctioned at 1pm ET on 6 February, with the following two sales occurring individually on the following two consecutive days, respectively. All of these auctions will take place on a yield basis and will settle on 15 February.
The 3-year issuance is the largest since December 2021, but there were larger sales during the Covid-19 pandemic to help fund the emergency measures brought in during the pandemic.
Jon Day, global bond portfolio manager at Newton Investment Management, said that given the short maturity date of these assets, there is “much less risk” surrounding these deals. Given the 30-year issue of $25bn is the largest ever for this note, Day said the auction results will be “closely watched”.
In response to the completed sales so far, yields on US 10-year bonds jumped from around 3.9% at the end of last week to highs of 4.17% by Tuesday (6 February), settling at around 4.14% at the time of publication, according to MarketWatch data.
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The sale of 10-year notes was met with widespread demand, with indirect bidders taking 71% of the sale, according to Dow Jones data.
The 3-year note sale was met with a similar reaction, according to reports, with indirect and direct bidders taking up the majority of the sale, while primary dealers took about 16.3% of the notes.
Day explained that the 10-year sales were more important objectively, as these are “generally regarded as the ‘benchmark’ Treasury so the results of its auctions are more closely watched than others”.
Further auctions are billed for later on in the year, with a $70bn five-year note auction taking place in April, which would be the biggest ever sale for debt with a maturity of two years or more.
The Treasury also plans to increase the February and March reopening auction size of the 2-year floating rate note by $2bn, and the April new issue auction size by $2bn.
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In the initial statement, the Treasury said it has faced “significantly” increased issuance pressures, adding that it intends to continue gradually increasing coupon auction sizes in the February to April 2024 quarter.
The Treasury said it “believes that these cumulative changes will leave [it] well positioned to address potential changes to the fiscal outlook and the pace and duration of future System Open Market Account redemptions”.
Day added: “Yet again, the US Treasury is asking investors to buy bonds at a rate 1% less than the cash rate. There are no signs that the somewhat relentless supply of Treasuries will cease any time soon, with US fiscal deficit still running at 6% of GDP.
“However, markets are anticipating a Fed rescue, with five rate cuts priced in over the next year,” he added.
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But Newton’s base case was “more sceptical” according to Day, adding that “conditions have eased significantly since the Fed dropped its hawkish language”.
The Federal Reserve eased up on its anti-rates stance at the latest monetary policy meeting when chair Jerome Powell said the board was untied in cutting interest rates this year.
The Fed elected to hold rates at 5.25%-5.5% at said meeting, matching market expectations at the time.
However, Day said that given the rebound in economic data, it was unlikely the Fed would exceed the triple rate cut it has indicated.
“The 1970s shadow of declaring victory over inflation too soon continues to loom large,” he said.
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