For 40 years, predictability has been the key to Treasury issuance. Back in the day, America’s fiscal branch funded itself with “tactical” bond sales, which turned out to be disruptive to financial activity. So in 1982, they switched to a more orderly approach: a regular schedule of issuance, communicated well in advance. According to Treasury officials, this strategy has saved taxpayers a substantial amount of money by reducing overall borrowing costs.
As part of this methodical programme, the Treasury has been releasing a “quarterly refunding announcement” for decades. Usually, this kind of release doesn’t attract much attention outside the wonky world of finance. But on November 1st, Wall Street was fixated on it. Ian Lyngen of bmo Capital Markets even called it a “unique moment in market history,” more important than the meeting of the Federal Reserve on the same day. “All that matters at this moment is supply,” he declared.
Investors are on high alert for a few reasons. America’s fiscal deficit is large, almost 6% of GDP for the fiscal year 2022-23, driven up by high interest rates. This has put pressure on bond markets. At the last refunding announcement in August, the market was surprised by the increase in total issuance and the amount of long-dated debt, leading to several auctions that “tailed.”
This has exacerbated the sell-off in long-dated bonds since the summer. While short-term Treasury yields have remained steady, long-term bonds’ yields have spiked. But the Treasury’s November announcement soothed markets, with planned issuance increased and concentrated at the short end. Short-dated t-bill issuance now makes up more than one-fifth of total debt issuance, slightly higher than historical levels.
This news was well received by the markets, with the yield on the ten-year Treasury falling about ten basis points after the release. It was a reassuring outcome for all involved, especially amid such volatility. The Treasury officials will continue to stick to their regular programming and publish their next set of issuance plans in three months’ time. But with markets so unpredictable, it is becoming increasingly challenging for the Treasury to stay consistent.
This Treasury’s ability to reassure investors is reassuring for all involved, particularly given the volatility of the current marketplace. Officials will stay the course on their scheduled issuance plans, with the next set to be published in three months. Nevertheless, staying consistent is becoming more and more challenging due to market unpredictability.
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