The US finance ministry is bracing for its largest bond auction in history, as Treasury Secretary Steven Mnuchin seeks to sell predominantly short-to-medium-term bonds to private investors to refinance the US public debt.
Kristian Rouz — US Treasury Secretary Steven Mnuchin might become the newest record-setting finance minister in US history, as his department prepares to sell $81 bln worth of Treasury bills at an upcoming auction. Mnuchin’s bond issuance is poised to eclipse the record-setting bond sales under Timothy Geithner — Treasury Secretary in 2009-2013.
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The US Treasury has ramped up its bond issuance over the past few months to finance America’s rising budget deficit and President Donald Trump’s fiscal stimulus. This time, however, the issuance of new Treasury notes comes amid rising bond yields in the open market, supported by the increasing Federal Reserve’s interest rates.
All these factors are driving investor demand for Treasury notes —despite the Fed selling Treasury notes from its bond portfolio, and foreign countries selling their Treasury holdings as well.
“Deficits aren’t going anywhere and Treasury will need to continue to ramp up issuance,” Jon Hill of BMO Capital Markets said. “They’ll stay focused on the front-end given their stated guidance of trying to maintain a broadly constant weighted-average maturity of their outstanding portfolio.”
Less than 10 years ago, then-Secretary Geithner had to issue massive amounts of Treasury bonds to finance the Obama administration bailout programs.
Only until recently was the Treasuries market the opposite of today — with the Fed’s ultra-low interest rates, high investor demand for havens, and elevated Treasury note face value, the US central Bank had to absorb the lion’s share of those securities.
This resulted in the Fed’s balance sheet growing from under $1 trln to $4.5 trln between 2009 and 2016, but this figure has fallen to some $4.17 bln as of late September.
However, Mnuchin’s Treasury note issuance is targeting primarily the private-sector investors, This explains why the Treasury is set to focus on maturities of five years or less — in other words, short-term and therefore more liquid bonds.
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“Bond auctions at long maturities in Germany and the US received modest demand, suggesting that appetite for long-term government paper is not particularly strong,” a team of bond market analysts from the Italian bank UniCredit wrote in a note.
Albeit US Treasuries have been in high demand in the open market over the past few days — particularly so, in the face of the stock market volatility, some market analysts are skeptical Mnuchin’s $81-billion sale could meet sufficient demand.
“Don’t get too carried away with the buying; there isn’t a major spree at hand, but we could see an organized move in increasing size if equities continue to take it on the chin,” Kevin Giddis of Raymond James said.
If the Treasury issuance fails to meet strong enough demand, bond value will drop — and, as it move inversely to Treasury yields — a mounting upward pressure on the Fed’s interest rates is quite likely.
One way or another, this falls in line with the broader pivot to supply-side policies of the Trump administration — despite the President himself sometime criticizing the officials for advancing the overhaul too quickly.
Back in the early 2010s, 30-year Treasuries were the main staple of Geithner’s borrowing patterns.
This time, Mnuchin’s approach is different: with the ongoing economic expansion in the US, investors are not as much seeking safe haven assets — such as long-term bonds — focusing instead on higher-yielding, easy-to-resell securities.
And the Treasury Secretary believes an auction that focuses on securities maturing in one to five years from now would be the most appropriate in the current macroeconomic climate.
“Treasury has been preparing the market for the new five-year TIPS (Treasury inflation-protected securities) auction date that they have said they are going to add,” Jonathan Cohn of Credit Suisse Securities USA said.
Additionally, Mnuchin’s bonds will be easier for the federal government to pay off in five years’ time — or less.
Trump administration officials generally believe the ongoing economic resurgence will eventually allow the US government to erase the lion’s share of its debt due to the expansion in tax base, a rise in foreign trade revenues, and a greater accumulation of wealth in the US.
The Treasury’s quarterly refunding announcement is due on 31 October.