Auctions of government debt, normally routine events for the Treasury Department, have suddenly become very important to financial markets.
With debt, deficits and bond yields all surging, investors are watching closely how the government will go to market with its borrowing needs.
Both bond and stock markets have been volatile amid fears of oversupply at a time when the Federal Reserve is keeping monetary policy tight, and as investors are demanding a premium for interest rate risk and geopolitics is posing various wild cards.
That’s why an announcement Wednesday on refunding, entailing the size of auctions as well as the duration mix of the debt that will be issued, is expected to draw even more market interest.
“The reality is, there is a supply-demand mismatch in the market today, and that is what has led to this move in bond yields,” said Josh Emanuel, chief investment officer at Wilshire. “Some have said that the issuance is almost more important than what the Fed says or what the Fed does, but I actually think both in combination are really important here.”
Indeed, the two entities are both pivotal in determining how the U.S. is going to manage its mammoth debt load. That symbiotic relationship will be on full display this week when the Treasury Department makes its refunding announcement Wednesday at 8:30 a.m. ET, and the Fed follows with its decision on interest rates that same day at 2 p.m. ET.
Investors got a preview of the Treasury’s direction Monday, when the department said it will be auctioning off $776 billion of debt in the final quarter of calendar 2023, a bit below market expectations. Treasury said it will auction another $816 billion in the first quarter of 2024.
Further details on those auctions will be provided on Wednesday.
“You might see sufficient demand step up into the market here with, frankly, real yields at around 2½%,” Emanuel said. “At a period of time when there is a heightened degree of risk more broadly, in terms of equity valuations, there is a high degree of geopolitical risk that has developed here over the course of the past month or so. I do think that market participants have to be in tune to all of that. So you might actually find some demand.”
What to watch
The key variables markets will be watching are the actual sizes of the auction as well as the mix between shorter-term Treasury bills against “coupon” issues, as strategists term longer-duration notes and bonds.
“We think the US Treasury’s upcoming quarterly refunding meeting might deliver a surprise relative to market expectations — in which the Treasury might decide to increase coupons at a lower pace than what its ‘regular and predictable’ strategy might have suggested in August,” Guneet Dhingra, head of U.S. interest rate strategy at Morgan Stanley, said in a note to clients.
The Treasury’s reluctance to refinance its shorter-term debt into longer maturities back when rates were at rock bottom drew the ire recently of Stanley Druckenmiller, the billionaire founder of Duquesne Capital.
Speaking at an event for the Robin Hood Foundation, Druckenmiller said Treasury Secretary Janet Yellen should have been issuing more debt at 10- and 30-year durations but opted instead to focus on the shorter end of the curve.
“I literally think if you go back to Alexander Hamilton, it is the biggest blunder in the history of the Treasury,” he said during a chat with fellow titan Paul Tudor Jones, in a video circulated Monday on X, formerly known as Twitter. “I have no idea why she’s not called out on this. She has no right to still be in that job.”
Treasury officials did not immediately respond to a request for comment.
For now, markets are expecting some tweaks to the past schedule of Treasury auctions.
Dhingra said he anticipates the auction size to be raised by $2 billion a month for 2-, 3-, 5- and 10-year notes, while auctions for 20-year bonds will be unchanged. As far as T-bill issuance, he expects it to rise to about 22% as a share of marketable debt outstanding, higher than Treasury’s 15%-20% standard range.
The total auction size announced Wednesday for the following week should be around $112 billion, according to Jefferies economist Thomas Simons. He sees the auction sizes in November breaking down as a $2 billion increase of 2-year notes and $1 billion each for 3-, 5- and 7-year notes, $2 billion for 10-year new issues and reopenings, $1 billion for 20-year bonds and $2 billion for 30-year bonds.