Treasury refunding preview: Taking a breather

Summary

On May 1, the U.S. Treasury will complete its regular quarterly refunding process. The quarterly refunding is the standard process through which Treasury communicates any changes in its debt management policy.

The torrid pace at which Treasury has been ramping up its debt issuance over the past year looks set for a breather. The federal budget deficit has narrowed in fiscal year (FY) 2024 compared to FY 2023, led by strong revenue growth and roughly flat spending. Furthermore, the Federal Reserve appears poised to slow its pace of balance sheet runoff in the months ahead.

In our view, current Treasury security coupon auction sizes appear well-suited to meet Treasury's financing need, and as a result we do not expect any changes to auction sizes at Treasury's upcoming refunding announcement. One small exception is in Treasury-Inflation Protected Securities (TIPS), where Treasury likely will continue to initiate small auction size increases in order to keep TIPS' share of the Treasury market unchanged.

That said, net issuance of coupon securities will remain sizable due to past auction size increases. With Treasury notes and bonds doing the heavy lifting for government financing in the quarters ahead, we expect Treasury to lean much less heavily on issuance of Treasury bills. The stock of outstanding T-bills has increased from $4 trillion to $6 trillion over the past year, an enormous 50% increase. We project net T-bill issuance to be -$225 billion (i.e. $225 billion of paydowns) from March 31 through year-end.

Given our expectations, we would be surprised if the May 1 Treasury refunding announcement created fireworks in financial markets similar to what occurred in the second half of last year. Treasury seems well-positioned to meet its financing need for at least the remainder of the year.

That said, the 2024 U.S. presidential election is less than seven months away, and with it may come material changes in U.S. fiscal policy. Sooner or later, Treasury likely will need to ramp up its auction sizes once again to meet the deficit needs of the future, and markets may need to adjust. Stay tuned.

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