Treasury to Rely On More Short-Term Borrowing as Deficit Seen Climbing

By FeaturesDow Jones Newswires

The Treasury Department said Wednesday it will need to issue more debt this quarter to accommodate rising budget deficits, and it also plans to adjust the size of its debt auctions beginning next month in response to the Federal Reserve's moves to shrink the size of its bond portfolio.

Treasury unveiled what it described as "modest" increases to its nominal coupon and two-year auction sizes beginning next month. The government's announcement followed on its November statement that it intended to concentrate more of its additional borrowing through the sale of shorter-term securities.

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Bond investors and analysts said that the plan for additional borrowing was generally in line with market expectations, though some investors may have expected a larger increase in the sale of longer-term securities and that, combined with the emphasis on seeking funding from shorter-term borrowing, could add momentum to the trend of a flatter yield curve.

The announcement "is consistent with what they've been doing" and is likely to add pressure on shorter-term yields to rise relative to longer-term rates, said Thomas di Galoma, managing director and head of Treasury trading at Seaport Global Holdings.

Over the next quarter, Treasury expects to increase the sizes of its 2- and 3-year note auctions by $2 billion a month, or a total of $6 billion by the end of the first quarter. It also said it would increase the size of its floating rate note auction by $2 billion in February.

Treasury also plans to boost the auction sizes of its 5-, 7- and 10-year notes, as well as its 30-year bond auctions, by $1 billion each starting this month. TIPS auction sizes will remain unchanged, it said.

Budget deficits are projected by private economists to rise this year as spending increases outpace gains in federal receipts, driving new borrowing needs. At the same time, the Fed has been purchasing less government debt every quarter as part of its plan to passively shrink its holdings of Treasury and mortgage securities accumulated during bond-buying campaigns after the 2008 financial crisis.

As a result, the Treasury not only needs to issue more debt to finance government operations, but it will need to find more private buyers of Treasury bonds to replace the Fed.

Analysts said that both investors and the government tend to benefit from effective communication about borrowing strategy. Understanding the Treasury's strategy helps investors position their holdings in line with how the government intends to borrow, which in turn helps the government achieve lower borrowing costs, as investors tend to sell bonds and drive up interest rates when their expectations aren't met.

"On first blush it's about what we expected," said Ray Remy, head of fixed-income trading in New York at Daiwa Capital Markets America Inc. "Clearly the government needs to borrow more, and Treasury's job is not to surprise the market."

Treasury also said Wednesday it expects it can continue to pay the government's bills "through the end of February," but urged Congress to act promptly to lift the federal borrowing limit. The agency has been deploying extraordinary measures since Dec. 8 when the last suspension of the debt limit expired.

Write to Kate Davidson at kate.davidson@wsj.com and Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

January 31, 2018 10:27 ET (15:27 GMT)

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