August Refunding: Coupons Rise Again - TDS

Analysts at TD Securities noted that the Treasury delivered a more aggressive $1bn/month increase in 5yr auction sizes compared with the February and May refundings. 

Key Quotes:

"The 2yr and 3yr auction sizes will continue to increase by $1bn/month while 7yr, 10yr, 30yr and 2yr FRN sizes will increase by $1bn over the quarter. Ongoing front-end auction size increases should continue to flatten the 5s30s curve and widen the 2yr Treasury-OIS spread."

"Treasury announced that the first 2m bill will be auctioned on October 15. The bill will be auctioned on Thursday and settled on Tuesday, and 1m bills will gradually transition to this schedule as well. The change will include a transition period to aid bill investors who cannot invest in overnight repo. Treasury did not announce a size for the new auction, but we expect an initial $35-45bn size for 2m bills. We expect modest declines in existing bill auction sizes to make room for the new issue, and look for Treasury to hold a higher cash balance in Q4."

"We look for bill supply to increase by $150bn in July and August, likely helping to pressure FRAOIS wider in the near-term. We maintain our 45bp target for Dec 2018 FRAOIS.
Treasury delayed the decision on a new 5yr TIPS and altering the TIPS auction calendar to November. We expect a new October 2019 5yr TIPS issue to be announced in November 2018. Given the magnitude of the alteration to the TIPS auction calendar, Treasury will prefer to give markets ample time to set up. This should be supportive for 5yr TIPS BEs in the near-term."