Finance.TT learned that the US Treasury Department has kept the size of quarterly issued long-term bonds unchanged for two consecutive times, and maintained its bond guidance, which expects that the issuance of bills and bonds of various maturities will not need to be increased in the "visible few quarters." The Treasury Department said in a statement on Wednesday that it will issue up to $125 billion worth of bonds next week in its so-called "quarterly refinancing auction," with maturities of 3, 10, and 30 years. The result ultimately matches the general prediction of US bond traders, as they believe that the department can make up for any funding shortages during this period by selling more bills.

However, many US bond market participants, including Goldman Sachs and Bank of America, have seen some risks that the US Treasury Department will have to revise its bond guidance in the future to include the possibility of issuing larger-scale long-term US bonds, given the huge budget deficits of the US federal government. But for now, the Treasury Department has reaffirmed its May statement's bond guidance.

However, in the view of many investment banks such as Bank of America and Goldman Sachs, given the continuing worsening of the US government's deficit expectations, the Treasury Department may have to modify its future bond issuance guidelines, especially for the issuance guidelines for long-term US bonds. Raising bond issuance expectations will undoubtedly trigger various US bond yields to enter an upward trajectory in the short term, especially the yields of various US bonds with short holding maturities.

The US Treasury Department stated in this latest statement: "Based on the expected borrowing needs, the Treasury Department expects that it will not need to increase the nominal debt or FRN auction sizes at least in the next few quarters." FRN here refers to floating rate notes issued by the Treasury Department,

As is known to us all, US Treasury bonds usually consist of two parts: short-term bills and maturity bonds of 2 years and above. Among them, the bill maturity is very short, the longest holding period is one year, and its prices and yields are closely related to the benchmark interest rate and short-term interest rate expectations set by the Federal Reserve.

With inflation rates slowing down significantly in recent months, it is widely expected that Federal Reserve officials will signal at the next monetary policy meeting, which ends on Wednesday afternoon US time, that they will cut interest rates for the first time after the rate hiking cycle begins in September. The lower expected benchmark interest rates will help reduce the total cost of US bonds, and the total cost of US bonds in recent years has accounted for a growing proportion of the Treasury Department's outstanding debt.

After a series of economic data was released on Wednesday, the yields of US Treasury bonds of various maturities fell after the data was released, especially after the release of weak ADP employment data, reflecting the market's increasingly firm expectations for the Fed's first rate cut in September and two more cuts later this year. The US debt management agency also said that it is increasing the amount of debt repurchased by the Treasury Department in the coming months. The repurchase plan was launched earlier this year to support liquidity in the US bond trading market. The 10-year Treasury yield fell about 4 basis points to 4.10%.

TBAC and bill assets.

In addition, officials asked the Treasury Borrowing Advisory Committee (TBAC), an external group composed of US bond traders and other market participants that provides advice and important recommendations to the Treasury Department, to review its proposal for the share of bills that can be sold as total debt, which will expire within a year. TBAC had previously recommended a range of 15% to 20%.

However, in recent times, the ratio (the proportion of bill assets in the total outstanding US debt) has exceeded the predicted range of 15%-20% by TBAC. But TBAC previously stated in its guidance that the Treasury Department has a "flexible" position on the proposal.

Before TBAC may make new demands, some Republican politicians and economic policy commentators accused Treasury Secretary Janet Yellen and her debt-issuing team of artificially adjusting the scale of these long-term securities and even choosing to use short-term debt called bills to meet additional funding needs.

The committee said in another report that "most" TBAC members believe that an average of about 20% over time is a good balance between interest cost, financing volatility, and one-time rolling over a large amount of debt risk.

They also said that US debt managers should not consider the proportion of bills in total debt as the top consideration when deciding to issue bonds. TBAC members stressed that the key is to continue to follow a regular and predictable bond issuance policy framework. They propose that a 15% share is an appropriate lower limit for the operation of the US bond market.

On Wednesday, Treasury Department officials also stated that TBAC members generally emphasized regular and predictable issuance of bills and bonds, rather than insisting on a specific proportion of bills. Officials also pointed out that TBAC's recommendations are no longer forcibly set within the range of 15% to 20%.

With the Federal Reserve reducing the amount of US Treasury bonds due each month without replacement, this in turn has eased the burden of the Treasury Department selling more debt to the public to fund the fiscal deficit.

Later on Wednesday, it is widely expected that the Fed will signal that it will begin cutting interest rates, providing further monetary policy relief for the Treasury Department by reducing the government's debt bills. The pace of so-called quantitative tightening (QT) – central bank asset reductions – is expected to remain at the current normalized level of up to $25bn of monthly government bonds.

The Federal Reserve will make its final interest rate decision at 2pm Washington time, after which Fed Chairman Powell will attend a press conference and make critical monetary policy comments.

As for next week's refinancing auction, $125bn in debt issuance will be made up of the following parts:

$58bn 3-year bonds issued on August 6.

$42bn 10-year Treasuries issued on August 7.

$25bn 30-year bonds issued on August 8.

The refinancing will raise approximately $14bn in new cash.

In recent weeks, many US bond traders have said that given the fiscal outlook, the Treasury Department will eventually have to raise the issuance size of bills and bonds of all maturities again, with the main logic being that the US federal deficit is set to hit its highest since the financial crisis. Tradable US Treasuries have exploded from about $12tn a decade ago to $27tn.

Regarding the trajectory of bill issuance, the department said on Wednesday that it expects 'modest increases' in the size of short-term bills 'for next week's auctions' and then to maintain this pace until August. It may see a slight decrease in early to mid-September, when some tax payments expire. Given the actual fiscal circumstances, it is expected that 'all bill auction sizes' will increase through October.

US bill supply has grown by about $2.2tn since the beginning of last year, lifting its debt burden above the 15-20% range recommended by the TBAC before its new guidance on Wednesday.

But Treasury Department officials have repeatedly said it is not a problem and stressed the important recognition of the need for flexibility by the TBAC. In its statement on Wednesday, the TBAC emphasized further that: 'The committee unanimously noted the Treasury needs to maintain flexibility for adjustments as time passes and market dynamics evolve, which is critical.'

The Treasury Department said the issuance size of floating rate debt would also remain unchanged over the next three months. As for inflation-protected bonds (TIPS) issued by the Treasury, the Treasury has raised the size of its 5-year TIPS auction on October 5 by about $1bn, the only new maturity bond type to be issued per quarter. The Treasury also reopened its 10-year TIPS in September with a $1bn increase.

The Treasury Department's statement on Wednesday also detailed new US bond market repo programs from August to October. After more than a year of analysis and testing, the Treasury launched a new US bond repurchase program in May to support liquidity in the bond trading market. The department said the cash management buybacks are scheduled to take place in September 2024.