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US Treasury Secretary Steven Mnuchin is preparing to confiscate Timothy Geithner's sale of a record amount of notes and bonds as he seeks to finance America's growing budget deficit.
Many major broker strategists expect the Treasury to increase coupon sales with the announcement of the quarterly rebate on Oct. 31, taking the total amount of 3, 10 and 30 year titles offered for sale. next week. at an unprecedented level. There are also many who believe that emissions remain more heavily skewed in favor of debt maturing in five years or less.
The previous record for so-called refund sales was $ 81 billion, set by Geithner about nine years ago, as America was recovering from the Great Recession. This time, the burgeoning budget deficit is fueled by tax cuts, spending increases and population aging rather than a catastrophic economy. In fact, the unemployment rate has fallen to its lowest level since almost half a century.
"Deficits are not going anywhere and the Treasury will have to continue to increase its emissions," said Jon Hill, interest rate strategist at BMO Capital Markets. "They will remain focused on the front end because of their stated desire to maintain a relatively constant weighted average maturity of their current portfolio."
US borrowing requirements pushed the fiscal gap to its highest level in six years in the past year. At the same time, support from the Federal Reserve is dwindling as the central bank narrows its balance sheet and chooses not to replace the assets of some Treasurys as they mature. In addition, rising interest rates are weighing on the country's debt cost of more than $ 15.3 trillion.
The US budget deficit reached $ 779 billion during the 2018 fiscal year ending September 30, representing 3.9% of total economic output and an increase of 17% over the 12 months precedents. The Congressional Budget Office predicts that this gap will reach $ 973 billion in 2019 and will exceed $ 1 trillion next year.
The total bids for the 3, 10 and 30 years following the announcement of the last repayment in August was $ 78 billion. At the time, the Treasury had increased by one billion dollars each month during quarterly bond auctions at two, three and five years. It also boosted debt sales to 7, 10 and 30 years by a one-time amount of $ 1 billion during the quarter.
The strategists of major brokers, including Deutsche Bank AG, Bank of America Corp., Citigroup Inc., TD Securities and Credit Suisse Securities, expect a similar upward trend against the Treasury this time.
Some predict, however, that the Treasury will do different things. This includes George Goncalves of Nomura Securities, who said the government could extend the outrageous increases up to the seven-year term. Mike Schumacher, Head of Interest Rate Strategy at Wells Fargo Securities, predicts that the Treasury will almost mirror the changes that have occurred since August, but he notes a $ 2 billion increase in ten-year auctions, at the same time. times for the first edition of the neighborhood and the reopening of security.
Brokers are also forecasting a further $ 1 billion increase in variable rate securities over the quarter. In addition, the Treasury will lay additional groundwork for the probable addition next year of a five-year sale of Inflation-Protected Securities, or TIPS, according to their schedule. The Treasury is currently releasing a new edition of the five-year TIPS auction in April, followed by two reopenings.
"The Treasury is preparing the market for the new five-year TIPS auction date they have announced," said Jonathan Cohn, head of interest rate trading strategy at Credit Suisse Securities (USA) LLC.
However, Secretary Mnuchin may not need to further increase auction size.
Goldman Sachs Group Inc. this month reduced its deficit forecast for fiscal 2019 and 2020 by $ 50 billion to $ 1 trillion and $ 1.125 trillion, citing, in part, additional revenue from tariffs. on the import of US President Donald Trump. In a note from Oct. 23, Alec Phillips, Goldman's strategist, said that this could mean that after an additional round similar to the previous quarter, the market will see "more progressive" bid size increases.
The time the Treasury chooses to continue to increase quarterly sales is important for bond market participants, as the new offer is one of the upside winds for US yields. The benchmark 10-year return this month reached 3.26%, a level unmatched since 2011, although stock market volatility and the confidence lost in the tightening of the US Federal Reserve have since 3.09% Monday morning in New York.
The reduction of the Fed's balance sheet, which increases the amount of debt the Treasury must sell to the public, is also essential to the supply situation. In its regular survey of brokers before the announcement of the refund, the Treasury asked how long the Fed would continue to reduce its portfolio. The central bank's balance sheet has swelled following the 2008 financial crisis with the addition of stimulus by the Fed through direct purchases of bonds, but it now allows $ 30 billion worth of securities. Treasury to mature without being reinvested each month.
Priya Misra, Head of Global Pricing Strategy at TD Securities, expects the Fed to stop using Treasurys by December 2019 at the latest. Given this, she predicts that the growth in auction size will cease after another increase at the February announcement.
Steve Kang, of Citigroup, said that no further increase in the number of auctions would be necessary during this fiscal year, after those announced this week. Barclays Plc's strategists say the same thing.
Morgan Stanley's interest rate strategists, including Matthew Hornbach, join this idea and see a halt to increases until 2020 if there is an upward rally in this week's announcement , according to a note of 26 October. On top of that, they even see a 40% chance that the Treasury will surprise investors by choosing not to increase sizes this time around.
"The increase in returns we have already seen shows that the market is concerned about a significant future offering," said Misra of TD. "The Treasury could, to avoid the market getting too scared, say that we do not expect further increases in auctions. But the big question for the Treasury is what the Fed does with the runoff of its wallet. "
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