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Treasury‘s $4 Trillion Funding Task Signals Record Auction Slate

Treasury Secretary Steven Mnuchin is likely to boost the government’s quarterly round of debt auctions to unprecedented levels this week to finance a deficit that’s set to surpass estimates of $4 trillion for this year as lawmakers discuss additional economic stimulus.

Treasury’s announcement Wednesday on its issuance plans for the coming months will signal how Mnuchin plans to manage a debt burden that’s poised to eclipse the record seen in the wake of World War II as a share of the economy. Analysts see the department needing to raise massive amounts of cash every quarter possibly into 2021.

Mnuchin has already lifted auctions of most bill maturities and some coupon-bearing debt to records as he finances the government’s efforts to cushion the economy against the pandemic. On Wednesday, the department will likely hoist its quarterly refunding auctions — encompassing 3-, 10- and 30-year securities — to a historic amount. It is also set to expand that round to include 20-year bonds, which it’s reintroducing for the first time since 1986.

“The deficit is going to be big not just for the rest of 2020 but also into 2021,” said Zachary Griffiths, a rates strategist at Wells Fargo. “Auction sizes are just going to keep needing to go higher.”

Wells Fargo is among bond dealers that expect the soaring debt load to eventually push up long-term borrowing costs. But so far that’s not happening. With the Federal Reserve vowing to hold rates near zero for the foreseeable future and buying hundreds of billions of dollars of Treasuries to keep markets calm, yields are still close to record lows.

Dire Statistics

The refunding is hardly the only thing traders will be watching this week. March labor statistics are forecast to show a staggering decline of more than 21 million jobs and a 16% unemployment rate.

Against that dismal backdrop, the benchmark 10-year Treasury yield has been capped below 0.7% in recent weeks, after rebounding from an all-time low of 0.31% in March. It enters this week at 0.61%.

Treasury raised the size of its 3-year auction last month by $2 billion relative to March. Most dealers predict Treasury on Wednesday will announce another $2 billion boost for May, and corresponding increases in June and July. The firms also expect at least a $1 billion boost to the 10- and 30-year sales next week relative to February’s refunding.

The majority of dealers also expect the government to signal larger sales are ahead for notes of all other maturities, as well as floating-rate and inflation-linked securities.

20-Year Reboot

In February, Treasury said the 20-year bonds would follow the structure of 10- and 30-year Treasuries, with new issues at the refunding months of February, May, August and November and two reopenings in subsequent months.

Here are highlights of what some dealers forecast for the size of 20-year sales beginning this month and the potential for additions of other maturities:

  • May auction forecasts range from a low of $10 billion, from firms including BMO Capital Markets, to a high of $16 billion, from firms including Daiwa and Nomura. The consensus centers in the $13 billion-$15 billion range
    • Forecasts for the June and July reopenings are for about $1 billion to $3 billion less than the May sale
  • The 20-year reintroduction “will be a critical part” of efforts to issue more long-term debt, said Credit Suisse strategist Jonathan Cohn
    • “We expect strong demand, particularly from indexers”
    • “An ultra long, say 50y or 100y bond, may be floated again” in the future

Treasury’s Herculean funding task comes as the U.S. has been pumping trillions of dollars into the economy, with lawmakers starting to negotiate — at least in public — a possible fifth bill that could add another $1 trillion to the deficit.

House Speaker Nancy Pelosi sees a “major package” for states and local authorities. Senate Majority Leader Mitch McConnell, who initially was cool to the idea of any more spending, now says it may be necessary.

“The stimulus to combat coronavirus as well as slower growth and lower tax receipts are all combining to impact the deficit and Treasury’s borrowing needs,” said Steven Zeng, a strategist at Deutsche Bank.

Fed Chairman Jerome Powell last week was clear that Congress should battle the impact of the virus as opposed to worrying about the deficit.

The Fed has trimmed its Treasuries buying to $8 billion a day, from a peak of around $75 billion as calm has returned to the market.

But Priya Misra and Gennadiy Goldberg of TD Securities say volatility may rebound amid the tug of war between the need for more debt issuance and the uncertainty over the trajectory of Fed buying.

“Ultimately we expect rates to be driven by the pace of economic reopening,” and forecast 10-year yields will retest 0.3% by the end of this quarter, the analysts wrote in a note.

What to Watch

  • The economic calendar:
    • May 4: Factory orders; durable/capital goods orders
    • May 5: Trade balance; Markit U.S. services PMI; ISM non-manufacturing index
    • May 6: MBA mortgage applications; ADP employment change
    • May 7: Challenger job cuts; nonfarm productivity; jobless claims; Bloomberg consumer comfort; consumer credit
    • May 8: Nonfarm payrolls; wholesale inventories
  • The Fed calendar:
    • May 5: Chicago Fed’s Charles Evans briefs reporters; Atlanta Fed’s Raphael Bostic in virtual discussion; St. Louis Fed’s James Bullard in webinar discussion
    • May 6: Bostic on virus response
    • May 7: Bostic; Minneapolis Fed’s Neel Kashkari; Philadelphia Fed’s Patrick Harker in virtual discussion
  • The auction calendar:
    • May 4: 13-, 26-week bills; $30 billion 105-day cash-management bill
    • May 5: $30 billion 119-Day CMB; $65 billion 42-Day CMB
    • May 7: 4-, 8-week bills

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